Growth Momentum: Analysts’ perspective

During 2022, the telecom sector continued to make progress in augmenting network capacity with additional fibre and wireless deployments to meet the rising demand for higher-speed networks. The launch of the Draft Indian Telecommunication Bill, 2022 was a key highlight on the policy front while on the technology front, the roll-out of 5G services in the latter half of the year was the high point. How the telcos revisit their tariffs in order to offset the expenses incurred in the roll-out of 5G networks remains to be seen. Industry analysts share their views on the sector’s performance in 2022, the pace of 5G roll-outs and the Draft Indian Telecommunication Bill, 2022…

 

 

 

 

 

 

 

 

How has the Indian telecom sector performed during 2022?

Benoy C.S.

At an overall level, the Indian telecom sector remained stable in 2022. While we witnessed some growth in telecom service re­venues in the early part of the year, it re­mained stable in the later quarters. Tele­com service providers (TSPs) continued to invest in upgrading their networks, and their infrastructure spend was in line with previous years. So, all in all, the market was stable in 2022. The highlight of the year was the successful completion of the 5G auction, which the industry had been waiting on for a long period.

Ankit Jain

Telecom operators started 2022 with tariff hikes. The year also saw a consistent upgra­dation of subscribers to the 4G network from 2G along with an increase in data usage. These factors resulted in an increase in mobile service provider ARPUs to more than Rs 173 in 2022 from Rs 140 in 2021. The industry’s adjusted gross revenue (AGR) witnessed healthy growth in 2022, a trend that has continued since last year. The industry’s AGR improved to around Rs 502.67 billion for the quarter ended September 2022, indicating a 20 per cent year-on-year growth. This growth is likely to continue in the medium term. The rapid growth of cheaper smartphones and relatively lower data tariffs, despite the hikes, aided data usage growth as well as upgradation to 4G network. These factors have resulted in India witnessing one of the highest data consumptions per subscriber per month across the world, next only to the Gulf countries.

In 2022, the industry is estimated to have reported revenues of Rs 2.6 trillion vis-à-vis Rs 2.2 trillion in 2021. The reve­nue growth was in conjunction with an im­provement in operating profits, which are estimated to have grown to Rs 1.3 trillion from Rs 1.1 trillion over the same period.

Purushothaman K.G.

The Indian telecom sector witnessed significant revolutionary changes in 2022 with spectrum auctions, 5G service laun­ch, and the release of the Draft Indian Tele­co­mmu­nications Bill, 2022. In addition, a tremendous push has been seen into various initiatives such as expansion to the rural market, public Wi-Fi networks, satellite-based narrowband internet of things networks, and investment in optical fibre networks to bo­ost the digital economy and bridge the digital divide. There has been a positive push to policy and structural reforms, whi­ch ce­me­nts the government’s plan to make this sector bigger and better.

5G services in India were commercially la­unched at the India Mobile Congress (IMC), which aims to give a fillip to the offerings, with broader collaboration amo­ng policymakers, the start up community, and the incumbents to create a sustainable shared ecosystem. Also, 5G has brought in a new set of players in the market, which is set to disrupt the 5G market on the tech­nolo­gical front with open radio access network (RAN), edge computing, etc.

What is your view on the momentum of 5G roll-outs in India? What further steps should telcos take to ensure that 5G connectivity re­aches both rural and urban areas?

Benoy C.S.

We are witnessing good momentum for 5G roll-outs in India. Bharti Airtel and Re­liance Jio have already declared that they will start offering 5G services in ma­jor cities from the first quarter of 2023 onwards and extend them pan India by the end of 2023 or early 2024. Competitive pressures will compel other operators to also roll out services quickly. Initially, the focus of operators will be on urban areas due to business considerations.

To improve 5G connectivity in rural areas, TSPs need to adopt multiple strategies. Building new infrastructure in rural areas is crucial for expanding the reach of 5G networks. Investing in technology that can extend the reach of 5G networks, such as beamforming and small cells, is also im­portant. Additionally, offering flexible pricing plans or subsidies can help make the service more affordable for rural custo­me­rs. Partnering with local government or com­munity organisations to help fund the deployment of 5G can also be beneficial. To further optimise the deployment of 5G, companies can explore the possibility of net­work sharing for all greenfield dep­loyments. Finally, focusing on the fiberisation of all towers to reduce the usage of microwaves for backhauling will greatly improve the efficiency of 5G networks.

The government should also support TSPs in persuading concerned governme­nt agencies to permit the mounting of antennas on electricity and telephone po­les, thereby facilitating a cheaper roll-out of 5G in rural areas.

“The highlight of the year was the successful completion of the 5G auction.” Benoy C.S.

Ankit Jain

Auctions for 5G spectrum took place in 2022, which saw participation worth more than Rs 1.5 trillion. All the existing operators along with the new entrant, Adani Da­ta Networks, participated in the aucti­on to buy spectrum across the 700 MHz, 800 MHz, 900 MHz, 1800 MHz, 2100 MHz, 2500 MHz, 3300-3600 MHz and 26 GHz bands. Participation in this spectrum auction was boosted by the relaxed payment terms offered for the auction with very low upfront payment requirements vis-à-vis the previous auctions. Telcos paid Rs 178.75 billion as upfront payment for this auction.

These auctions kick-started the roll-out of 5G services in the country. Over the last couple of months, the telcos have been rolling out 5G services across various cities. While the roll-outs have started and customers are being upgraded to the 5G net­work, the same is being done at no ad­ditional cost as 5G-specific plans have not been launched yet. Moreover, 5G deployment will entail network densification and close placement of radio antennas, with possible co-location on street furniture. While small cells are likely to be the first option to start with, these need to be connected with fibre for efficient network coverage and delivery. India currently has 30-35 per cent of its towers fiberised. It would require sizeable capex to fiberise an adequate number of towers to provide a sturdy network base.

However, unlike 4G, ICRA expects the 5G launch to be more phased out and pocket-specific to areas that will yield he­al­thy returns. As several use cases are un­der development, it will take some time for 5G to reach an adequate level of penetration. To begin with, it will be more focus­ed on enterprise-based use cases. The total industry capex, as per ICRA’s expectations, is likely to be around Rs 3 trillion over the next four to five years.

“Technology upgradation to 5G is likely to drive growth going forward, along with the upgradation of a large pool of subscribers to higher technologies.” Ankit Jain

Purushothaman K.G.

Over the past six months, 5G has been a key priority for connected ecosystems with the push from the government and incumbents. 5G services have already been rolled out in more than 100 cities for the consumer market and it is also opening the gateways for enterprise-wide use cases.

As per KPMG in India and IMC, the expected 5G service roadmap for telcos is likely to be undertaken in three phases. Primarily the “resource build” (B2C-led) phase, with a deeper reach of the B2C ma­rket with nationwide roll-outs; then the “consumption-driven” (enterprise-led) pha­se to fine-tune their operations with res­pect to coverage and virtualisation of net­work functions for the enterprise space. La­ter, “as-a-service” (artificial intellige­nce/IoT/network-as-a-service) phase with widespread awareness of the benefits of private 5G, and deployments to pick up until 2025 as the return on investment (RoI) narrative shifts to enterprise-led private 5G deployments. As the next steps, te­lcos are likely to continue building infrastructure and creating disruptive use cases to expand connectivity; however, the em­phasis should be on reachability and affor­dability by creating a shared network.

“There has been a positive push to policy and structural reforms, which cements the government’s plan to make this sector bigger and better.” Purushothaman K.G.

What are your views on the Draft Indian Telecommunication Bill, 2022?

Benoy C.S.

The new telecommunication bill is aimed at addressing some of the current challenges and issues faced in the sector and facilitating the smooth roll-out of 5G. For example, the new bill aims to clear many bottlenecks related to right of way (RoW). It attempts to persuade all “public entities” to permit TSPs to establish underground or over-ground telecommunications infrastructure on their premises by providing a uniform and non-discriminatory regulatory framework. By public entities the bill has included not only the central government and the respective state governments but also the local authorities and authorities, bo­dies, companies or institutions incorporated or established by the central government or the state government.

The bill also incorporates some modifications to policies related to spectrum ma­nagement. Here, all the lessons and cha­llenges the government faced in the last couple of years on spectrum have been well addressed, and it provides more clarity and a clear roadmap.

Another important highlight is that it empowers the Department of Telecom­mu­ni­cations to offer flexibility in dealing with restructuring, defaults in payment and in­solvency. This includes deferment of payments, conversion of a part or all of pending amounts into shares, write-off of such amounts, and relief from the payment of such amounts. While these enable faster decision-making in bureaucratic processes, it is equally important to put in place adequate checks and balances to avoid corruption and nepotism in the future.

Purushothaman K.G.

The Draft Indian Telecommunication Bill, 2022 is focused on four pillars – ensuring efficient utilisation of spectrum, efficiency in policymaking, support for innovation and security for the end user. One of the main goals of the bill seems to be ensuring fair competition among providers, with me­asures such as the establishment of an independent regulator to enforce competition rules. The bill also emphasises on addressing the issue of financial strain on businesses by recommending actions to ea­se providers’ financial burden and en­cou­rage investment in the field.

Another important aspect of the bill is its focus on consumer protection. It in­cludes provisions to ensure that consu­mers have access to reliable and affordable servi­ces, as well as a mechanism for resolving complaints and disputes. Additionally, it en­courages investment in research and de­velopment and helps start-ups engaged in the development of cutting-edge technologies such as 5G. The bill also includes provisions to strengthen security, safeguard us­er data, and support the development of the digital economy by encouraging innovation and competition in the industry.

What is the industry outlook for 2023? What trends do you expect in terms of telcos’ fin­an­cial growth, tariff movement, subscri­ber additions, ARPUs, etc.?

Benoy C.S.

At an overall level, I expect telecom service revenues to be more or less in line those in  pre­vious years, with some marginal gr­owth in mobile services. It is expected that in the second half of this year, there will be some tariff hikes. While operators may not inc­rease the per unit price, we will see them tightening the screws on the free usage th­resholds with an attempt to monetise more from medium to heavy users. In 2023, we will witness more spending, in the range of 12-15 per cent, from telecom operators for rolling out their 5G networks. This will give a boost to the telecom infrastructure and other ancillary sectors.

Now, with 5G coming in, the focus of telecom service companies will be to create enough industrial use cases where 5G can add a lot of value. There will be an increased focus on enterprise telecom services, and operators will try to tap into the revenue opportunity in adjacent markets such as managed security, communication platform-as-a-service, and the cloud.

Ankit Jain

While in the core business technology up­gradation to 5G is likely to drive growth going forward, along with the upgradation of a large pool of subscribers to higher technologies, in the non-telco business, which includes enterprise business, cloud services, digital services and fixed broadband services will also remain crucial for charting industry growth. ICRA expects telecom operators to implement another round of tariff hikes, which will also aid growth in revenues and profitability. As per ICRA’s expectations, the industry’s revenue is likely to grow to more than Rs 3 trillion in 2023, with the operating margin exceeding Rs 1.55 trillion. Amid all this improvement, the industry’s debt levels are likely to remain unwieldy, exerting pressure on the debt coverage metrics. The la­test round of spectrum auctions added more deferred debt and ICRA expects the industry debt to exceed Rs 6.3 trillion by March 2023, with a marginal moderation going forward. The debt metrics continue to remain under pressure, with debt/OPBDITA expected to cross 4.5 times and in­terest coverage to touch around three tim­es in fiscal year 2023, before the debt/ OPBDITA improves to around four times in fiscal year 2024.

Purushothaman K.G.

The industry outlook looks promising for India with a focus on enterprise solutions, with private 5G use cases along with the consumer market. Over the next couple of years, the industry should collectively think of a sustainable future, with a robust ecosystem of partners to work in line with the government’s Digital India mission. To achieve such an ecosystem, telcos and oth­er players should work towards technological deployments with open RAN and virtualised RAN, active network sharing, and shared capex budgets.

It is broadly expected that by 2025, the average per user data connection per month will surpass 50 GB and ARPUs will increase by 8-10 per cent to reach Rs 175. With such high expected data loads, Indian telcos are pinning their hopes on the promise of 5G, which is expected to allow them to bring in enhancements in capacities, efficiencies in their network, increase in ARPUs and, at the same time, open new realms of revenue streams from the 5G play.