Nitesh Jain, Director, CRISIL Ratings Limited

The recent tariff hikes have given rise to many questions on their impact and signi­ficance and whether they are eno­u­gh. It is a tale of contrasts. India has the second highest average data traffic per user globally, and among the lowest average revenue per user (ARPU) per month. The int­ense price wars of 2016-19 led to a sharp de­cline in ARPU just as data consumption went off the charts. The ARPU declined from Rs 182 to Rs 116 while data usage per subscriber per month surged to around 12 GB from less than 1 GB during the period. Return on capital em­ployed (RoCE), an important metric to assess long-term business viability and in­vestment decisions, slid to almost zero in fiscal 2019 from 8 per cent in fiscal 2016.

Telcos initiated broad-based tariff hikes in December 2019, which boosted ARPU to Rs 135, while data usage per subscriber per month climbed to around 14 GB in fiscal 2021. However, the sector was dealt a big blow towards the end of 2019 when the government demanded adjusted gross revenue (AGR) dues of over Rs 1.2 trillion. The crystallisation of sizeable AGR liabilities negated the expected improvement in RoCE from tariff hikes.

The sector has been in repair mode since then, revising tariffs selectively to dial up ARPU. However, companies had shied away from a major tariff hike for prepaid plans until the last week of November 2021, when a telco announced tariff hikes for its plans by 20-25 per cent, followed by the other two major telcos. Tariff hikes and ongoing customer upgrades led by the continuous rise in data consumption will improve ARPU by around 20 per cent to Rs 160-165 next fiscal from around Rs 135 in the previous fiscal.

ARPU growth will lead to non-linear growth in profitability due to the high operating leverage of the telecom sector. The sector’s earnings before interest, tax, de­preciation and amortisation (EBITDA) are expected to surge around 40 per cent to approximately Rs 1 trillion in the next fiscal from Rs 720 billion in the 2021 fiscal (see Graph 1). Furthermore, the four-year mo­ratorium on government dues recently an­n­ounced by the union cabinet could pro­vi­de an annual cash flow relief of appro­xi­mately Rs 320 billion to telcos that have op­ted for it. Debt in the telecom sector inc­reased to about Rs 4 trillion as of March 31, 2021, from around Rs 3.3 trillion as of Mar­ch 2020 because of the large unpaid AGR dues. The debt is expected to rise to around Rs 4.6 trillion in the current fiscal because of additional liabilities pertaining to spectrum purchased in the March 2021 auction.

The debt to EBITDA ratio should re­main largely stable at 4.1. The ratio could improve to 3.8 next fiscal and co­uld even be below 2.5 for the top two players, ow­ing to full-year benefits of tariff hikes and equity infusion.

The improvement in EBITDA will en­able telcos to invest in the roll-out of 5G mobile service networks over the medium te­­rm. Key players have invested around Rs 5 trillion in 4G services between fiscals 2017 and 2021, and will now need to invest fu­rther for 5G. Even prudent bidding at the 5G spectrum auction likely next fiscal wou­ld require an investment of at least around Rs 700 billion, assuming telcos will fo­llow a calibrated approach initially and buy 5G sp­e­­ctrum only in metros and Ca­tegory A cir­c­l­es, where data consumption is high. The es­­­timated investment is as per the current re­s­e­r­­­ve prices recommended by the Tele­com Re­­­­gulatory Authority of India for 5G sp­e­c­t­­rum bands, assuming the top two telcos w­o­­­­uld buy out the entire 100 MHz spe­c­tr­u­m in each of the metros and Ca­te­gory A circles.

In sum, the adverse triad – large capex, low ARPU and sizeable AGR liabilities – resulted in the sector’s RoCE sliding to ar­ound 3 per cent in fiscal 2021 from about 8 per cent in fiscal 2016. While the recent tariff hikes will increase the RoCE to 7-8 per cent, the sector will need an ARPU of Rs 180-195 (see Graph 2) to improve the RoCE to 10-12 per cent. That said, any in­tense bidding for spectrum beyond the me­tros and Category A circles, and more-than-expected investment in fiberisation for 5G, could have a bearing on credit profiles.