According to ICRA, the telecom industry woes will continue as the industry is required to pay a substantial amount to the Department of Telecommunications (DoT) in the form of retrospective adjusted gross revenue (AGR) related dues. These amounts, as per the Supreme Court order dated October 24, 2019, are sizeable (including the interest and penalties) and in the event of an outflow towards these payments, it will create additional pressure on the balance sheet of the telecom operators, depending on the funding mix. This comes at a time when the industry’s health was on the recovery track, on the back of deleveraging initiatives, moderation in capex intensity and restoration of pricing power.
The sector has passed through a phase of turbulence during the last few years, with intense competition and pricing pressures leading to a decline in revenues and profitability. Consistent downward revision in prices resulted in one of the steepest falls in the industry average revenue per user (ARPU) levels with the estimated blended ARPU falling from Rs 169 in Q1 FY2017 to Rs 124 in Q1 FY2020; the industry AGR fell from Rs 445.7 billion to Rs 286.5 billion in the same period. The overall high operating leverage of the industry meant that the decline in revenues percolated to pressure on profitability and cash flows.
Further, the industry is saddled with elevated debt levels and consistently high capital expenditure (capex) requirements. The debt has consistently remained high owing to reduction in organic cash flow generation and consistently high capex requirements. As per ICRA estimates, the debt as on March 31, 2019 stood at Rs 5 trillion. The private telecom operators undertook deleveraging measures during FY2020, which included rights issue by Bharti Airtel and Vodafone Idea, IPO of the African operations by Airtel and hiving off of the tower and fibre assets by Reliance Jio. While these have been concluded, other plans like further equity infusion by Airtel, monetisation of stake in tower companies and fibre assets are on the anvil for some operators. These are expected to result in decline in debt as on March 31, 2020 to around Rs. 4.4 trillion (without taking any incremental debt due to AGR issue).
This financial year also witnessed steady improvement in ARPU levels driven by weaning of low ARPU subscribers with the introduction of minimum recharge plans. Further, the telecom operators announced a steep tariff hike, first of its kind in a long time, to the tune of 35-40 per cent, which will manifest into improvement in ARPU levels and healthy improvement in organic cash flow generation. Since the subscriber base has largely saturated, the key drivers for growth in the telecom sector would be: a) pricing improvement, and b) identifying and implementing new use cases for the telecom services. The latter is a longer-term goal and would require more investments and thus, in the immediate term, it is the push for higher realisation which is achievable and has been attempted.
However, despite the debt reduction and EBITDA improvement attempts, the coverage indicators are expected to continue to remain weak, with estimated debt/EBITDA likely to be more than 7x and interest coverage less than 2x as on March 31, 2020. The impact of tariff hikes will be visible in FY2021, when the EBITDA is expected to improve by 21 per cent over FY2020 levels. This, along with reduction in debt levels, is expected to result in estimated debt/EBITDA of around 5x and interest coverage of 2.5x as of March 31, 2021.
Amid these attempts by the telecom operators to reduce their debt levels, the SC order on October 24, 2019 pertaining to the definition of AGR and inclusion of some non-core revenues while calculating the AGR from retrospective basis has added to the woes of the industry. The telecom operators are required to pay a revenue share to the DoT in the form of license fee and spectrum usage charges which are derived from the AGR. The SC ruling mandated the operators to include some components of revenues like dividend income, rental income, forex gains, etc while computing AGR on a retrospective basis, which along with interest and penalties on the same resulted in sizeable dues for the operators. In case these have to be funded through debt, it has the potential to derail the deleveraging attempts by the industry. However, clarity is awaited on the final amounts and the payout timelines as the operators have filed a review petition with the SC. The government has announced deferral of spectrum auction instalment payments for FY2021 and FY2022, providing a minor financial succour to the industry.
During FY2019, the industry incurred a capex of more than Rs 1 trillion and the capex intensity, as measured by the capex/sales ratio has been significantly higher over 50 per cent compared to international standards of 17-18 per cent, especially in the last few years. However, with the telecom industry achieving a sizeable penetration for 4G, the peak capex cycle for Indian telcos is over and thus the capex intensity is expected to witness moderation till the time there is a technology upgrade to 5G. The capital expenditure incurred by the telecom operators has remained high on account of expansion and upgradation of network towards 4G, amid increasing data requirements, changes in technology and spectrum acquisition. The moderation in the capex intensity is expected to improve the cash flow position, going forward.
Among other sources of revenues, ICRA believes greater proliferation is expected in the home broadband and Direct-to-Home (DTH) services. While these services have been provided by many telecom players for many years, a new entrant with plans for widespread penetration, is likely to provide greater fillip to these segments. Another emerging trend is greater focus on content by the telecom operators to increase customer stickiness. These developments would mean greater convergence of various means of mobility and entertainment, with telecom networks serving as the foundation.