Among the several transformational changes the pandemic has ushered in, the large-scale adoption of high speed broadband is likely to be a long-lasting one. As the world adapts to digitalisation, the telecom sector will play a key role in building the requisite infrastructure and technology support. Industry leaders share their views on the sector’s performance in 2020, the impact of Covid-19, the key challenges and the post-pandemic outlook for the sector…
How would you rate the telecom sector’s performance in 2020? What were the key highlights and developments?
The year 2020 saw an unprecedented change in the way we work, live and interact. Data traffic witnessed an unprecedented surge, with India’s wireless monthly data traffic per user touching 12 GB, the highest in the world.
A focus on 4G and home broadband were the key highlights of 2020. The sector witnessed the roll-out of LTE networks, spectrum refarming for 4G through the decommissioning of 3G networks, and the migration of 2G subscribers to 4G aided by low-cost smartphones. Operators increased their focus on the home broadband market on the back of the “new normal” of work from home, and online education and entertainment. That said, the sector continues to be under financial stress with operators having a large debt on their balance sheets, which continues to impede their ability to invest.
During the first half of 2020-21, the industry’s adjusted gross revenue (AGR) witnessed a year-on-year growth of 25 per cent. This was driven by an increase in the industry’s ARPU to over Rs 90 for the first half of 2020-21, from Rs 74 in the first half of 2019-20, as reported by the Telecom Regulatory Authority of India. Debt, however, continues to remain the Achilles’ heel of the industry, despite sizeable deleveraging in 2019-20, which, along with moderation in capex intensity, resulted in a decline in debt to Rs 4.4 trillion as of March 31, 2020.
The year 2020 was a year of resilience. While the pandemic created a health and economic crisis the world over, it also provided the proverbial silver lining for the telecom sector, which had been facing significant headwinds in the past. As telecom played a critical role in supporting consumers and businesses as they transitioned to the new reality, we saw significant uptake in telecom services. This is evident in the overall increase in the number of internet subscribers to 776.45 million in September 2020 from 718.74 million in September 2019. The increased uptake of digital services led to a substantial increase in monthly ARPUs for access services, from Rs 78.17 in September 2019 to Rs 103.87 in September 2020, registering a 32.8 per cent year-on-year increase. Digitalisation became more and more pervasive during the year, and this trend is likely to increase further, with telecom playing the role of essential services and the foundation for the new digital lifestyle. As per the recent TMT CEO (telecommunications, media and technology chief executive officers) survey by KPMG in India, 85 per cent of telecom CEOs expressed confidence in the long-term growth prospects of the sector.
Dr Mahesh Uppal
The telecom sector came out with flying colours in 2020. Despite its precarious financial health and other challenges posed by the pandemic, the sector served as a lifeline for millions of Indians, helping them connect with each other for work and socialising. The sector could deliver quality entertainment through over-the-top content services. However, we must not forget that millions were left out due to inadequate access to broadband. For them, the situation was even worse, as they struggled to survive without work, income, mobility and broadband.
What are some of the key telecom and technology trends that shaped the sector during the Covid-19 pandemic? What is your outlook for technology/digital infrastructure acceleration in the post-Covid era?
In the wake of the pandemic, as home bandwidth requirements grew, the otherwise mildly growing fixed subscriber segment exhibited a consistent month-on-month surge. High speed and reliable connectivity has become an important tool for customers to thrive in the “new normal”. These shifts are expected to stay. Mobile broadband, on the back of increasing smartphone penetration and demand for data, will continue to grow. Further, digital infrastructure has been on an upward trajectory. Going forward, catalysts such as enterprises’ investments in virtualisation, the government’s push to cloud adoption, and the increasing demand for agile, loosely coupled, asset-light models will accelerate the growth of the cloud and data centres.
Indian telcos will also expand their virtual and open radio access network footprint through the deployment of small cells as well as massive MIMO technology across dense locations as an overlay on their current 4G macro cell networks.
The Indian edge computing market is gaining momentum. Players across the value chain, including telcos, web-scalers and technology companies, as well as the start-up ecosystem, will continue to collaborate to bring together the hardware, platforms and service segments to leverage this opportunity.
During the Covid-19 pandemic, despite a surge in the load on networks owing to the work-from-home regime, online classes and increased content streaming, the sector demonstrated its resilience and fulfilled the increased data needs of subscribers. There was an impetus to fixed line broadband, and the segment witnessed traction in terms of subscriber numbers. In terms of wireless networks, telcos focused more on increasing capacity through additional loadings on existing sites and deploying massive MIMO sites across the country, in addition to small cells.
As Covid-19 led to the near-complete transition of people’s lives from the physical to the digital domain, the telecom sector proved to be the catalyst that made this transition possible. Covid-19 heightened the importance of ultra-reliable connectivity for at-home work, school and social interactions. Demand surged for telecom services as businesses adopted remote ways of working and monitoring, resulting in increased adoption of digital technologies.
With digital transformation taking precedence in boardroom strategies, the KPMG in India CEO survey indicates that companies are rapidly investing in digitalising their operations and creating next-generation operating models. They are also looking at creating new digital revenue streams and a seamless digital customer experience. With digital emerging as the mainstay business philosophy, the telecom sector has a pivotal role to play in not only providing stable connectivity, but also in expanding its play in providing digital services to businesses and consumers. The increasing collaboration of telecom service providers with tech giants and cloud service providers is the initial step towards them emerging as technology service providers.
Dr Mahesh Uppal
There is wide recognition that broadband can mitigate much of the distress caused by disruption in work and social life. Enhanced remote working has perhaps been the most visible and significant trend during the pandemic. Many companies and other enterprises are reviewing their dependence on real estate and physical offices. Increasing work-from-home will mean lower costs and efficiencies, but also new challenges. For instance, are all homes and families geared up for the new normal?
What are your expectations/predictions regarding telco participation and strategy in the upcoming 4G spectrum auctions?
Given the fragile financial position of most telcos in India, we may not see healthy participation from them. Over the past few years, telcos have rolled out a significant part of their 4G network using their existing spectrum holdings. We expect telcos to largely focus on renewing their expiring spectrum with some strategic buying of new spectrum in key circles based on need.
The upcoming spectrum auctions will put 2250 MHz of spectrum on the block, across seven bands at a reserve price of Rs 3.92 trillion. Participation in these auctions is expected to remain subdued, with a low likelihood of meaningful participation in the 700 MHz band. ICRA expects telcos to renew their expiring spectrum while augmenting their spectrum holdings in select circles to improve network capacity. Based on this, the spectrum auctions are anticipated to fetch Rs 550 billion-Rs 600 billion for the exchequer, with Rs 200 billion-Rs 250 billion to be paid upfront, thus adding to the total debt burden of the industry.
Dr Mahesh Uppal
The participation will be feeble. The reserve price is high. There is little evidence that companies will want to buy any additional spectrum beyond what is needed to replace the part for which the tenure will run out soon.
What is your opinion on India’s 5G readiness? When do you see commercial roll-outs taking place?
Indian telcos have been conducting 5G trials with multiple original equipment manufacturers and have been working on the underlying 5G infrastructure. However, telcos continue to be under severe financial stress with large debt on their books, which will impede their investment in 5G. Selective telcos, based on their investment appetite, will invest in 5G, and will prioritise high ARPU pockets for their initial launches.
The technology upgrade to 5G will require denser network coverage and greater fiberisation. 5G has been knocking on the doors and will be the next growth driver in the core telecom business. However, high spectrum prices, the nascent stage of the ecosystem, the relatively low penetration of 4G services, the limited paying capacity of the Indian consumer, and the precarious balance sheet position of telcos are likely to play spoilsport in the technology upgradation process to 5G. Moreover, the sector is moving towards an inflection point wherein the next phase of growth will be driven by non-telco businesses, such as the enterprise business, cloud services, digital services and fixed broadband services.
With 5G auctions on the anvil, 5G is likely to become a reality in India soon. We expect the commercial roll-out of 5G by the end of the current year or early next year, and it gaining maturity and scale by 2023/2024. While telecom operators are busy expanding their 5G trials, one expects infrastructure readiness, network upgrades and consumer maturity to gain full momentum in a couple of years.
Despite being the second largest digital consumer market in the world, India lags significantly behind on digital infrastructure. The fibre km per capita in India is 0.09, as compared to 0.87 in China and 1.3 in the US and Japan. Similarly, as per industry estimates, India needs around 100,000 additional towers over the next one year to meet its growing data and voice requirements. In addition, the advent of 5G will require network densification, including small cell deployment. The problem is further intensified in rural areas where the teledensity is only 58.96 per cent, against the national teledensity of 86 per cent.
Dr Mahesh Uppal
India could be an important market for 5G in the coming years. However, it is unlikely that services can be deployed this year or that demand would be high in the initial phases. I would not expect appreciable deployment of 5G services any earlier than mid-2022.
What should be the key priorities and focus areas for telcos in 2021?
- Enterprise play (large/small and medium enterprises): There is a significant opportunity for Indian telcos to move from being purely telecom connectivity providers to information and communications technology solution providers. Similarly, micro, small and medium enterprises are now increasingly seeking new markets and cost-effective solutions, which presents an attractive opportunity for Indian telcos.
- Home broadband business: India currently has low household fixed broadband penetration. Telcos can leverage this opportunity and deploy cost-effective alternative solutions, offering value-added services beyond just connectivity.
- Moving up the digital value chain: Telecom operators are already helping in the orchestration and enablement of the digital ecosystem, and should continue strengthening their role in the value chain.
- Leveraging 5G: By building partnerships, investments in research and development, and network trials, telcos must define their 5G play this year.
- Future-proofing the operating model: As the consumer matures along digital lines and as the adoption of disruptive technologies accelerates, telcos would be required to transform their operating model from both the “customer relationship” and “technology excellence” perspectives through strategic investments in network infrastructure and future technologies.
ICRA expects telcos to dial in the next round of tariff hikes over the next one or two quarters, which is likely to drive revenue growth in 2021-22. In light of the higher funding requirements arising from pay-outs towards AGR liabilities, spectrum purchase, regular revenue sharing with the government and auction instalments (which start from 2022-23), it is imperative for the players to embark on sustainable and sizeable expansions in ARPU. ARPU expansion will result in revenue growth and, given the high operating leverage, the margins are also likely to expand. These measures are expected to translate into an improvement in the debt coverage metrics of the industry, even as the overall debt remains high. Tariff hikes and upgradation of subscribers from 2G to 4G are expected to result in an improvement in ARPUs to around Rs 220 in the medium term.
To capture the next wave of growth emerging from enterprise digital transformations, it is critical that telcos have a twofold focus – on making their organisations more resilient, and on creating business models that move beyond the traditional voice and data streams. Strategic partnerships with solution providers and system integrators would be the key to monetising new revenue streams relating to the cloud, internet of things, artificial intelligence, etc. Telcos should carve out platform-enabled, sector-specific solutions and for this, collaborations and partnerships will be critical for speed to market.
Dr Mahesh Uppal
Telcos would need to fortify themselves financially. This may be a challenge since the pressure on tariffs and, therefore, on ARPUs will remain, even if it is easing a bit. Any steep increase in prices could hurt usage. The priority will have to be to offer more value through paid content, where margins can be much better.
What is your outlook for the industry? What are the key challenges facing the industry that must be addressed at the earliest?
As deployment of 5G technology has started increasing globally, the move to next-generation networks is imminent. This network and technology upgrade will be significant, capital intensive and akin to nation building.
However, increased price wars within the Indian telecom sector and large amounts of debt are key challenges. India today has one of the lowest wireless ARPUs (about $1.5) and one of the lowest data prices (about $0.09 per GB) in the world. It is imperative that the industry grows its ARPUs (to upwards of $3.1) to continue to be sustainable. This would also enable it to invest in the latest technologies such as 5G, and actively participate in changing business models.
In addition, the government may provide support through the following:
- Creating investment incentives such as accelerated allowances on capital expenditure
- Offering corporate tax breaks/tax holidays to balance the financial burden, both on spectrum and next-generation networks
- Rationalising telecom regulatory fees across AGR and spectrum usage charges
- Increasing the country’s annual budget for financing universal broadband access and simultaneously increasing efficiency in the utilisation of the Universal Service Obligation Fund.
ICRA expects industry revenue to grow by 11-13 per cent over the next two years, with operating margins improving to around 38 per cent for 2021-22. An improvement in cash flow generation, coupled with moderation in capex intensity, would limit the dependence on incremental external borrowings for operations. However, the addition of AGR liabilities to debt and the next round of spectrum auctions will act as dampeners. The total industry debt is expected to remain elevated at Rs 4.7 trillion as of March 31, 2022. Even as the debt levels remain high, the improvement in operating metrics is likely to translate into an expansion of the debt coverage indicators. Interest coverage is expected to improve to 2.5x for 2021-22 from 1.8x for 2019-20, and total debt/operating profit before depreciation, interest, taxes and amortisation is expected to decline to 4.6x from 6.7x over the same period.
ICRA notes that the next round of tariff hikes is on the cards. This, coupled with the consistent increase in data usage and steady upgradation of subscribers from 2G to 4G, as well as the proliferation of cheaper smartphones, is expected to drive revenue growth going forward.
Preparing for the evolution to 5G networks provides great opportunities and great risks for telecom providers. The buildout of 5G infrastructure is massively capital intensive, and the opportunities to accelerate returns on investment are yet to be created. Telecom companies need to carefully consider how to transform their business models to gain a greater share of the value that will be created by 5G. The government, on its part, should continue playing the catalyst’s role in the overall development of the sector by introducing concrete steps to ensure its long-term sustainability. Infrastructure creation, reduction of financial stress and the creation of a robust research and development ecosystem are some of the critical tasks that need to be addressed. The government should keep in mind the disruptive role of 5G while deciding on spectrum pricing to ensure that pricing is not a hindrance in the mass deployment and adoption of 5G in India.