The telecom industry continues to face headwinds in terms of revenue generation and profitability, although a slow recovery is on the anvil. Tepid cash flow generation against elevated debt levels has been a concern for the industry for some years and the recent fund raising by telcos has assuaged this only temporarily. Given this environment, 5G spectrum auctions along with the network capex required for service roll-out will likely exert further pressure on the industry and the same has the potential to disrupt the recovery process. The lack of established content and use cases, as well as the uncertainty around the capability of Indian subscribers to pay a premium for such services, further strengthens the case for telcos to avoid aggressive participation in 5G auctions at this juncture.
Recent trends indicate green shoots for the industry in the form of ARPU stabilisation; however, pricing recovery is expected to remain modest in the near term. Further, 2019-20 has witnessed some degree of deleveraging and some plans are on the anvil, which are expected to lead to a reduction in debt from Rs 4.75 trillion as of March 2019 to Rs 4 trillion as of March 2020. However, without firm visibility on cash flow recovery, this is only a temporary relief. That said, the debt coverage indicators continue to remain weak. In such a scenario, 5G spectrum purchase at high prices, followed by capex for network roll-out will add to the challenges of the industry.
The Telecom Regulatory Authority of India had come up with its recommendations for the auction of more than 8,000 MHz of spectrum across all the existing bands – 800 MHz, 900 MHz, 1800 MHz, 2100 MHz, 2300 MHz and 2500 MHz, along with the 700 MHz band, which went unsold in the October 2016 auction – and a new band, 3300-3600 MHz. At the reserve price, the valuation of the spectrum is Rs 4.93 trillion. Such a high valuation is on account of high reserve prices set for the 5G bands, although prices for the 700 MHz band have been revised downwards since the October 2016 auction.
The roll-out of 5G services is expected to entail heavy capex and a turnaround of the existing infrastructure, including new equipment, fibre deployment and higher number of towers. Data consumption is expected to continue to grow with more applications emerging around 5G. The speeds, volumes and applications would require the upgradation of networks from traditional microwave backhaul or copper-based cell sites to fibre as that is more reliable and has the capacity to carry huge amounts of data at high speeds.
India lags behind other countries in terms of fibre deployment with only 22 per cent of towers being fiberised vis-à-vis 80 per cent in China. To meet the growing demand for data and address the complexities with regard to the density of population, the fibre network will have to be expanded significantly. However, the telecom industry, which is reeling under the pressures of sizeable debt, low profit generation and intense competition, will find it challenging to incur such capex.
Furthermore, 5G is much beyond higher speeds. It is based on content, and applications such as internet of things, machine-to-machine communication, smart cities and smart homes. While globally some countries have concluded 5G spectrum auctions and telcos have started rolling out 5G services, adequate commercial content development is lacking; in the absence of this, it will be difficult for telcos to extract a sizeable premium from customers for such services.
The device ecosystem around 5G is still at nascent stages and the equipment is expensive for both telcos as well as subscribers. 5G involves good quality content and services, but, as of now, the applications around these are not fully developed even globally. Thus, in India, subscribers are not expected to pay a premium only for higher speeds, especially at a time when ARPUs for even basic voice and data services are at low levels. Also, the industry has still not been able to generate adequate returns from 4G services.
A natural progression for the industry would be to have the ability to escalate the tariffs for the existing relatively basic services before being able to command the pricing for 5G applications commensurate with the level of investments required. Furthermore, auctions are now a well entrenched means for leasing spectrum, which reduces the urgency for telcos to participate if the pricing is high. Thus, there is a case for telcos to wait for the development of the 5G ecosystem before participating in auctions.
