The Indian telecom industry is among the few sectors to have withstood the challenging times during the pandemic while also leveraging the new opportunities it created. During the year 2021, the announcement of a telecom relief package by the government has provided a ray of hope to the industry. Industry analysts share their views on the sector’s performance in 2021, the impact of the telecom relief package, telcos’ focus areas for 2022 and the future outlook…
How would you rate the Indian telecom sector’s performance during 2021? What were the key highlights and developments?
The Indian telecom sector witnessed a steady growth in 2021. Almost all key industry performance indicators demonstrated a positive trend. According to the Telecom Regulatory Authority of India (TRAI), teledensity increased to 88 per cent (as of October 2021) from 86 per cent in December 2020. The total average quarterly wireless data usage in the country also increased over 30 per cent from 2020 to 2021, a significant positive trend. India also tops the global wireless data usage per subscriber with an average usage of about 14 GB per month, up from 12 GB in 2020. With the increase in tariffs, the wireless ARPU also increased in 2021. Further, the country witnessed a solid rise in internet penetration in rural markets. Rural internet penetration per 100 people increased from 34 per cent in 2020 to 38 per cent in 2021 (as of October 2021).
The year 2021 started with the scrapping of interconnect usage charges (IUC), which resulted in the downward restatement of headline ARPU numbers. However, the actual cash flow generation and profitability was steadily rising on the back of upgradation of subscribers to 4G from 2G and consistent uptick in the use of telecom services. This was partly driven by the pandemic, which triggered a whole lot of activities from home like work, schooling and entertainment, which provided a fillip to data usage. March 2021 witnessed spectrum auctions, in which telcos not only bid for renewal of the expiring spectrum, but focused on consolidating their spectrum holdings. This auction fetched the exchequer around Rs 778 billion. While the operating metrics were steadily improving, the industry remained saddled with elevated debt and repayments were ballooning. In September 2021, the government came to the rescue of the sector as a whole and announced a series of relief and reform measures for maintaining the long-term health of the industry. And finally in November 2021, the telcos complemented the relief package with tariff hikes, wherein prepaid tariffs were hiked by around 20 per cent.
Murtuza Onali Kachwala
While the world is still not out of the shadow of Covid-19, 2021 served as a watershed for the Indian telecom sector in many ways. The telecom sector is one of the few industries to have not only withstood uniquely challenging times but also derived new opportunities from it.
One of the key highlights of 2021 would be schemes like the Atmanirbhar Bharat Abhiyan (self-reliant India) worth Rs 121.95 billion for manufacturing of telecom and networking products and increasing internet revenues. India is the highest contributor in the global mobile data traffic at 14.5 GB per smartphone per month. The telecom sector is the third largest sector in terms of FDI inflows, contributing 7.1 per cent of the total FDI inflow. The sector is expected to contribute 8 per cent to India’s GDP in 2022 from around 6.5 per cent at present.
The year 2021 was a landmark year starting with amendments around IUC abolishment that created a level playing field amongst telcos and allowed up to 100 per cent FDI under the automatic route, which gave way for huge investments in the telecom sector. The year saw the ushering in of significant policy and structural reforms, which cemented the government’s intention to create the robust telecom sector. These reforms gave a much-needed relief from a structural and procedural point of view by reducing the interest rate for delay in licence fee payment on an annual basis, increasing the tenure of payment, reducing bank guarantees across all services, etc. A major push was around spectrum, bringing surrendering clauses with 30-year payment periods and abolishing spectrum usage charges (SUC), all of which lay the ground for the upcoming 5G auctions and also create an environment of certainty within the investor and telco community. The year also set the foundation for the commercial launch of 5G, with 5G trials being undertaken by telcos. The success of these trials along with the augmentation of existing 4G spectrum resources through fresh auctions in March 2021 is expected to give a fillip to the sector and steer it towards exponential growth in the coming years. It is expected that 5G technology will represent around 39 per cent mobile subscriptions in India at the end of 2027, estimated at about 500 million subscriptions.
What will be the impact of the recent reform package announced by the government on the industry? What other measures does the government need to take to usher in long-term sustainability?
The key highlight in 2021 was the release of the new telecom reform and support package by the government. It will significantly boost investment into the sector and change the course of the telecom sector that has been reeling under a debt burden for the past few years. There are many far-reaching impacts of the recent reform package including:
- Simplification of the process and thereby reduction in the cost of operation: In the recent reform package, the government allowed the reintroduction of the Aadhaar-based eKYC process for issuing new mobile connections. Also, it introduced self-KYC as an alternative process for providing new mobile connections. Moreover, the requirement of storage of paper application forms was discontinued. These measures will push digitisation and significantly help operators simplify the process of onboarding new customers.
- Softening of the licensing terms that give more financial leverage to operators: The government’s recent decision to exclude all non-telco-related operations and activities, including media-related revenue from the applicable gross revenue (ApGR calculations), has a far-reaching impact on telecom service providers. This has been a long-pending demand by telcos, and it will help them transform into a digital company as per their long-term plan. To further reduce the financial burden of operators, the government has taken several critical decisions that will provide more economic leverage and capacity for operators. Another noteworthy initiative in this direction is the government offering an option to convert the interest due pertaining to the moratorium period to equity to the President of India.
- New spectrum reforms will enable its effective utilisation: Some of the recent government decisions will help telecom operators and the country effectively utilise spectrum. After bringing some stability to the telecom sector, the government needs to encourage healthy competition and keep the rising tariffs under check. Hopefully, the recent government decision to allow 100 per cent FDI through the automatic route for all telecom services (including telecom infrastructure provider – Category 1) will encourage more foreign players to actively consider India as an investment destination.
Under the relief package, the Indian government provided a moratorium on the adjusted gross revenue (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 financial year 2025. This moratorium on dues will impact the non-tax receipts of the government from the telecom sector. Two telcos have prepaid their dues towards earlier spectrum auctions totalling Rs 263 billion, thereby making up for the loss to the government. For financial year 2022, the telecom sector is expected to contribute to around Rs 540 billion to the government’s non-tax receipts, which will be close to the budgeted estimate for the fiscal. Moreover, the bank guarantee requirement for the telcos has been slashed and the Department of Telecommunications (DoT) has started returning the bank guarantees to the telcos, which improves the financial flexibility of the sector. This apart, rationalisation of the AGR definition, increasing the spectrum tenure to 30 years from 20 years, removal of SUC for future auctions, and reduction in the interest rate on delayed payments were the other key highlights of the package.
Murtuza Onali Kachwala
The telecom reforms announced by the government are the beginning of a new era for the sector as well as for boosting investment in the industry that is reeling under a debt burden. The union cabinet has approved a relief package that includes a four-year break for companies from paying statutory dues, permission to share scarce airwaves, change in the definition of revenue on which levies are paid and approval for 100 per cent FOI through the automatic route. It also provides telecom companies with an option to pay the interest amount arising due to the deferment of payment by way of equity. This will pave the way for a sustainable – three private plus one state-owned telecom operator structure – to serve a large market like India. The reform package underlines a clear intent on the part of the government to play a facilitating role in growing the sector and steering it towards the 5G era as well.
The government needs to take measures to ensure that operators are less occupied with litigations and more focused on promoting innovative long-term sustainability. More reforms focused on rationalisation of levies and taxes should be introduced. A plan to overhaul outdated telecom regulations should be implemented to keep pace with the industry growth and make 5G spectrum more affordable.
The recent reforms package gave some relief to the industry in the form of providing clear policy direction, removing operational and structural bottlenecks, paving the way for bigger investments and facilitating ease of doing business in the sector. These reforms have been a critical support to the financially beleaguered sector and we can see the benefits being reaped by some telcos that are availing the option of conversion of interest on deferred spectrum and AGR dues into equity. However, with the industry likely to play a catalytic role of ushering in digital innovation through 5G, a lot needs to be done in terms of further improving the financial health of the sector by reviewing the licence fee charges, removing SUC charges for previous auctions, effective utilisation of the Universal Service Obligation Fund, rationalised 5G pricing, rationalisation of taxation levies and adequate incentivisation for network and digital infrastructure expansion. Some of the other policy-related reforms required are 5G harmonisation, availability of adequate and contiguous spectrum, sharing of spectrum across bands, improvement in network coverage with incentivisation, coupling of wireline investments with wireless reach, improvement in incentives for coverage in rural communities, greening of the sector with clear definitions (aligned with the EU probably) and roadmaps, interoperability among spectrum bands, adoption of cloud-centric business models and regulations around it, and strengthening of security/privacy regulations for the sector. Overall, the regulations should encompass an umbrella view of how the connected ecosystems of the future can foster.
What are your expectations and predictions on telco participation and strategy in the upcoming 5G spectrum auctions? When do you see commercial 5G roll-outs happening in India?
In 2022, there will be more active participation in the 5G spectrum auction. These critical measures will reduce the risk for telecom operators, give them enough flexibility to maintain an optimal inventory, and discourage them from hoarding or overbooking spectrum in anticipation of increasing demand. This, in turn, will give them more confidence to participate in the upcoming auctions aggressively. With these changes, Frost & Sullivan expects commercial 5G roll-outs in India in the next 12-18 months.
With this relief package and complementing tariff hikes, the telcos have received sufficient headroom and cash flows to prepare for the next technology upgrade. However, the issues that still cripple the industry are high spectrum prices, relatively low fibre penetration, low tariffs (despite the latest hike), high cost of equipment, underpenetration of 5G-enabled devices, and a nascent ecosystem of applications and use
cases. If pricing is made more attractive, we can see some participation by telecom operators in select circles, where the roll-out is likely to start ahead of other circles. In terms of roll-out, metros and Category A circles are likely to see pockets of areas where 5G will be rolled out and a small segment of consumers will adopt the same. The penetration is likely to increase as we go along, similar to other technology upgrades, but the adoption rate is likely to be faster than previous technologies.
Murtuza Onali Kachwala
As per latest reports, TRAI has reportedly informed DoT that it is likely to submit its 5G price recommendations in March 2022. It means that if things go as planned, the country can witness 5G auction in July-August. Operators have already started conducting 5G trials. Bharti Airtel has successfully conducted India’s first 5G trial in the 700 MHz band in partnership with Nokia, on the outskirts of Kolkata. Reliance Jio has also successfully conducted trials on its indigenous 5G network. Nokia and Vodafone Idea have also partnered to trial 5G services using E band in areas where fibre is challenging to deploy.
The bigger benefit 5G can bring is enterprise and social transformation with excess capacity, lower latency and higher throughput with use cases such as private networks and fixed wireless access broadband. Affordable 5G for the Indian masses may take longer, but India will see commercial 5G launch this year.
The previous spectrum auctions in February and March 2021 did not see any participation in the sub-GHz or the mid-band spectrum and it was more of rebalancing and strengthening of spectrum positions in specific circles/states. Speaking of the next auctions scheduled in 2022, there is a lot more girth around policy direction, reform procedures, liquidity support measures and structural clarity than before. In addition, most of the operators have already baked in some 5G use cases in their trials across the country. With 13 cities now waiting for the first commercial 5G launch, telcos will align their urban-centric strategies even as they push to increase floor prices per GB. As per KPMG India, the mid-band spectrum is expected to see the most action at the next auction, as telcos will need to future-proof their holdings at least for a year, which will also align their marketing strategies with the use cases. The rural use cases, which might need more sub-GHz spectrum, could see a lukewarm response unless the pricing is favourable and aligns with the strategic direction of telcos.
With spectrum auctions expected in the second half of 2022, we expect commercial 5G roll-outs only towards the end of the year or early 2023. The first set of use cases are expected to be focused on enhanced mobile broadband (eMBB) centred around fixed wireless access (FWA), augmented reality (AR)/virtual reality (VR)-type applications, augmented maintenance and cloud gaming to some extent. The industrial internet of things, cameras and smart devices will nurture use cases around massive machine type communications (mMTC)-type applications. The ultra-reliable low-latency communication (uRLLC)-type applications are expected to gain momentum once 5G stand-alone is adopted at scale.
What should be the key priorities and focus areas for telcos in 2022?
In 2022, telcos should upgrade their legacy infrastructure and push their digitisation journey. They should also try to get into a strategic partnership with cloud, digital media, e-commerce and other service providers to enhance their product portfolio and increase their total addressable market from non-traditional emerging digital economies.
While technology upgrade remains the key focus area, which will drive growth for telecom operators, the industry is in the process of transformation from being a plain vanilla voice and data service provider to more of a technology and content-driven industry. Non-telco revenue sources like enterprise business, digital services, home broadband services are likely to have a higher share of revenues in the medium term. However, a leaner balance sheet will play a major part in this and thus the telcos should focus on deleveraging. Bharti Airtel Limited recently concluded its rights issue of Rs 210 billion and collected 25 per cent as upfront payment, while Vodafone Idea Limited is also scouting for a fundraiser.
Murtuza Onali Kachwala
The telecom industry is entering a new phase. Increased telecom tariffs, 4G penetration and SIM consolidations will result in positive earnings before interest, taxes, depreciation and amortisation for all the operators. With the much expected 5G roll-out to happen this year, telcos and vendors are transitioning to a fully virtualised, software-based, cloud-centric network architecture. The telcos need to prioritise and focus where they will play in the new value chain that is being created in the digital economy. Telcos are required to partner across the value chain with technology players, original equipment manufacturers (OEMs), etc., and work across sectors like manufacturing, healthcare and logistics to prove 5G use cases.
Another area that the telcos need to focus on is resolution of issues along with government bodies, such as absence of a regulatory framework on small cells; lack of backhaul availability; and non-uniform implementation of right-of-way rules by states and municipal bodies. It would allow telcos to harness the full potential of 5G.
Based on a study done by KPMG globally, it is estimated that connectivity holds only an 11 per cent share of the overall 5G plus edge global opportunity. For the industry to unleash the true potential of 5G, we have identified two critical goalposts for the industry to focus on. First, it should aim at convergence of connectivity and technology through partnerships with OEMs, system integrators, device manufacturers that will allow the industry to devise new solutions beyond just connectivity. Second, as telcos prepare themselves for 5G capabilities, they will need to overhaul their current operations support systems and business support systems, and adopt bespoke and agile architecture that is scalable. It will need to build a microservices-based architecture that will allow telcos to shorten the time-to-market for newer services and allow for greater flexibility in managing the infrastructure and services.
What is your outlook for the industry (in terms of competitive landscape, tariff movement, subscriber additions, ARPU/revenue growth, financial pressure, etc.)?
Frost & Sullivan believes the Indian telecom industry has left behind its tough testing times and will continue on the path of recovery in 2022. Now that operators have started increasing tariffs, we will further increase ARPU. Unfortunately, public operators will continue their declining trend and reduce themselves to a non-significant player in the wireless segment. For the wireline segment, we are also witnessing a declining market share of the public sector (in 2021, for the first time in the history of India, the subscriber market share of private operators surpassed the market share of public operators). Airtel and Jio will increase their market position in almost all telecom services, and it needs to be seen how Vi and other players respond to these competitive pressures. For sustainable and inclusive growth and to prevent the Indian telecom sector from becoming a duopoly market, it is essential that the government and other stakeholders facilitate and encourage healthy competition with three to four operators in all circles.
The latest round of tariff hikes wherein the telcos increased their prepaid tariffs by around 20 per cent will provide the much-needed traction in the ARPU levels. These hikes, coupled with the consistent upgradation of subscribers to 4G from 2G and increase in the use of telephony services, are expected to result in the improvement of industry ARPU (excluding Bharat Sanchar Nigam Limited) to around Rs 170 by the end of financial year 2023. ICRA expects the industry revenues to grow by 18-20 per cent in financial year 2023, followed by a growth of 10-12 per cent in financial year 2024, which given the high operating leverage is likely to translate into healthy expansion of operating profits, which are projected to grow by around 30 per cent in the 2023 fiscal. Debt, however, continues to remain the Achilles’ heel of the industry. ICRA expects industry debt levels to remain at around Rs 4.7 trillion as of March 31, 2022, before moderating to Rs 4.5 trillion by March 31, 2023. The debt levels have remained unyielding for quite some time now and with the expectation of improvement in 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 of March 31, 2023.
Murtuza Onali Kachwala
India is expected to have a digital economy of $1 trillion and active internet users are expected to reach 900 million by 2025. The government has also emphasised bolstering India’s domestic telecom manufacturing capacity. The year 2022 will be a year of increased ARPU, and strong revenue growth will be seen. 4G mobile data penetration is set to increase to 83 per cent from 66 per cent in 2021. ICRA estimates telecom service revenues to grow by 18-20 per cent in the 2023 fiscal, followed by a growth of 10-12 per cent in 2024, which given the high operating leverage, is likely to translate into healthy expansion of overall telco operating profits. Further, recent reform packages and measures announced with regard to future spectrum auction will support operators to fund capex for the tech upgrade to 5G and promote robust competition to ensure the survival of telcos.
The year 2021 saw significant rebalancing in the sector, with the government playing an active role in stabilising the industry through policy and structural reforms. The industry should collectively think of a sustainable future, where connectivity providers can elevate themselves. As India ushers in a new era in 2022 with 5G, the industry is betting on eMBB applications to gain momentum in the initial phase of the 5G launch, providing a 10-15 per cent boost to the top line with the real return on investment to start generating once mMTC and uRLLC use cases become mainstream. The role of telcos as an orchestrator of the connected enterprise ecosystem will also be a key factor in propelling the growth of enterprises in telcos. All in all, there is a robust time ahead for telcos and the connected ecosystem.