The telecom industry has implemented the long-awaited tariff hikes which has the potential to improve the industry average revenue per user (ARPU) levels to around Rs 170 by the end of FY’2023. This will result in increased profit generation, which coupled with the relief package announced by the government of India (GoI), provides enough headroom for the industry to undertake deleveraging as well as fund capex for the technology upgrade to 5G. With these tailwinds, Investment Information and Credit Rating Agency of India Limited (ICRA) has revised its outlook on the telecom services industry to ‘stable’ from ‘negative’.
While the green-shoots of recovery in the sector were sprouting with steady improvement in ARPU, the tailwinds started in the last 3-4 months when the GoI announced a relief package and then telcos followed this up with tariff hikes. Under the relief package, GoI provided a moratorium on the AGR and spectrum auction dues for four years.
As per ICRA calculations, this moratorium provides an annual cash flow breather of around Rs 400 billion for the industry till FY’2025. Moreover, the bank guarantee requirement for the telcos has also been slashed and the Department of Telecommunications (DoT) has started returning the bank guarantees (BGs) to the telcos, which improves the financial flexibility of the sector.
While the moratorium on the dues would impact the non-tax receipts of the government from the telecom sector, two telcos have pre-paid their dues towards earlier spectrum auctions totalling to Rs 263 billion, thereby, making up for the loss to the government. For FY’2022, the telecom sector is expected to contribute to around Rs 540 billion to GoI’s non tax receipts which will be close to the budgeted estimate for the fiscal.
Debt continues to remain the Achilles’ heel of the industry. ICRA expects industry debt levels to remain at around Rs 4.7 trillion as on March 31, 2022, before moderating to Rs 4.5 trillion as on March 31, 2023. Telcos have been focusing on deleveraging and Bharti Airtel recently concluded its rights issue of Rs 210 billion and collected 25 per cent as upfront payment, while Vodafone Idea (Vi) is also scouting for a fund raiser.
According to Sabyasachi Majumdar, senior vice president and group head, corporate ratings, ICRA Limited, said, “The latest round of tariff hikes wherein the telcos increased the prepaid tariffs by around 20 per cent will provide much-needed traction in the ARPU levels. These hikes coupled with consistent upgradation of subscribers to 4G from 2G and increase in usage of telephony services is expected to result in improvement in industry ARPU (excluding BSNL) to around Rs 170 by the end of FY’2023. We expect the industry revenues to grow by 18-20 per cent in FY’2023, followed by a growth of 10-12 per cent in FY’2024, which given the high operating leverage, is likely to translate in healthy expansion in operating profits, the same are projected to grow by around 30 per cent in FY’2023. These are likely to translate into a return on capital employed (ROCE) of around 10 per cent for FY’2023 for the industry.”
Meanwhile, Ankit Jain, assistant vice president and sector head, ICRA Limited, said, “The debt levels have remained unyielding for quite some time now and with the expectation of improvement in the profit generation after the latest tariff hikes, ICRA expects the debt metrics to improve as reflected by debt/OPBDITA of 3.4 times and interest coverage of 3.5 times as on March 31, 2023. The relief package provided the much-needed breather for the industry and the participants complemented the same with a tariff hike which coupled with equity raising plans would provide the ammunition required for the technology upgrade to 5G. While there has been an improvement in the operating metrics of the industry, the next phase of growth will be driven by the non-telco businesses, which include enterprise business, cloud services, digital services and fixed broadband services.”
