Anupama Arora, Vice-President and Sector Head, Corporate Ratings, ICRA Limited

Ankit Jain, Assistant Vice-President, ICRA Limited

While the telecom industry is still grappling with elevated debt levels and weak debt coverage metrics, the last fiscal has witnessed some improvement in the ARPU, driven mainly by tariff hikes implemented in December 2019, deleveraging measures undertaken by telcos, and moderation of the capex intensity. Meanwhile, clarity has emerged around the adjusted gross revenue (AGR) issue. However, the relatively short time frame allowed by the Supreme Court acts as a dampener.

Going forward, ARPU improvement and further tariff hikes are on the cards given the fact that telecom service providers are required to make sizeable payouts in terms of AGR liabilities, spectrum purchase, regular revenue share to the government and auction instalments, starting from financial year 2023. A sustainable and sizeable ARPU expansion is critical from the telcos’ perspective.

ICRA notes that the competitive intensity appears to be alleviating post combined efforts by the industry for raising tariffs. However, it is still some time before the tough competition recedes as it is unclear whether the next round of tariff hikes would be implemented across the industry or be limited to telcos facing AGR payments.

Further, the battlefront has shifted to the post-paid segment, wherein Reliance Jio Infocomm Limited has introduced new tariff plans, with lower rentals and higher content offerings. It remains to be seen how this will impact competition as India is primarily a prepaid market while internationally, many countries are dominated by post-paid connections. The post-paid segment has inherent benefits of higher ARPU and greater customer stickiness. While the share of post-paid subscribers in the total subscriber base is less than 5 per cent, their contribution to revenues and operating profit before depreciation, interest, taxes and amortisation (OPBDITA) of telcos is 12-15 per cent. Thus, it remains a lucrative segment for telcos. Reliance Jio has upped the ante in this segment, which can impact the ARPUs and profitability of the incumbents.

Notwithstanding the competitive intensity, telcos have been able to improve their ARPUs given the tariff hikes implemented in the past and consistent upgrade of 2G subscribers to 4G. This has resulted in an improvement in industry revenues and AGR in the first quarter of the financial year 2021. ICRA expects this trend to continue as telcos will again implement tariff hikes, with ARPUs expected to reach Rs 220 in the medium term. With this, the industry revenues are expected to improve by 12-15 per cent per annum for financial years 2021 and 2023, while OPBDITA is expected to expand by 22-25 per cent per annum given the high operating leverage.

The industry debt witnessed a decline following the deleveraging undertaken in financial year 2020, to stand at Rs 4.4 trillion as of March 31, 2020. However, post this, the Supreme Court’s order on AGR dues has added to telcos’ woes. While clarity has emerged on AGR payables as the Supreme Court ruled for 10-year payment terms, starting with financial year 2022, with a 10 per cent upfront payment by March 2021, a relatively shorter time frame of payment adds to the pressure on the industry. Further, spectrum auctions are anticipated in the current fiscal, which, along with the addition of AGR liabilities, are likely to further increase debt to Rs 4.9 trillion by March 31, 2021, before it moderates to Rs 4.65 trillion on March 31, 2022.

The improvement in the operating metrics is reflected in the debt coverage indicators – interest coverage is expected to expand to 2.7 times in financial year 2022 from 1.8 times in financial year 2020. During the same period, the total debt/OPBDITA is expected to decline 4.6 times from 6.7 times. Notwithstanding the improvement, the indicators continue to remain modest due to the elevated debt levels, which are the Achilles heel of the industry.

Telcos will have to find avenues, which include further monetisation of assets like fibre and data centres, to reduce their debt. In addition, they need to make consistent improvements in cash flow generation in order to upgrade their networks and be future ready. Given the precarious position of the industry balance sheet, India is likely to give the 5G call a miss for sometime. Further, the industry is in the process of transformation, from being a plain vanilla voice and data service provider to more of a technology- and content-driven industry. A leaner balance sheet will play a major part in this transformation.