Ankit Jain, Vice President and Sector Head, Corporate Ratings, ICRA
ICRA expects the telecom services industry to report a healthy revenue growth of around 12-14 per cent in FY 2025 over FY 2024, driven largely by the expansion in ARPU levels following tariff hikes by the industry in July 2024. Consequently, ICRA expects ARPU levels for the three private players to inch up to more than Rs 200 for FY 2025. Thereafter, a revenue growth of 10-12 per cent is expected in FY 2026, driven by another round of tariff hikes, taking ARPU levels to more than Rs 220. This also bodes well for profitability expansion. It is expected that operating profits will expand by 14-16 per cent in FY 2025, followed by a growth of 12-14 per cent in FY 2026. Industry-consolidated revenues are expected to increase to around Rs 3.2 trillion-Rs 3.3 trillion, with an operating profit before depreciation, interest, taxes and amortisation (OPBDITA) of around Rs 1.6 trillion-Rs 1.7 trillion for FY 2025.
In the absence of any major increase in the 4G subscriber base and also with the absence of any 5G-specific tariff plans to monetise these services, ARPU growth moderated in FY 2024. The industry implemented tariff hikes in July 2024, wherein telcos increased prepaid tariffs by 15-20 per cent, which will provide traction to ARPU levels and can result in additional operating profits of around Rs 200 billion for the industry, once these hikes are fully absorbed. This will result in increased profit generation, thereby providing headroom for the industry to undertake deleveraging as well as fund capex for technology upgrades and network expansion.
Industry capex picked up pace in FY 2024 with the expansion of the 5G network and the capex intensity remained elevated. The industry upfronted its capex towards 5G deployment and capex touched around Rs 800 billion in FY2024. It is likely to be around Rs 750 billion in FY 2025, moderating steadily thereafter. Capex intensity as measured by capex/revenue is expected to taper down from more than 20 per cent in FY 2025 to around 18 per cent in FY 2027. The major expenditure will be towards network densification and fibre deployment, which is likely to keep the cumulative industry capex at around Rs 3 trillion over the next four to five years.
Participation in the last spectrum auction remained subdued, largely in line with ICRA’s expectations, and fetched the exchequer around Rs 113.4 billion, which translates into an annual payout of around
Rs 11.1 billion for a period of 20 years, at 8.65 per cent rate of interest for telcos. Overall, in all the spectrum auctions concluded till date, the industry has purchased spectrum worth more than Rs 5.6 trillion, which resulted in a deferred liability of around Rs 4 trillion on the books of telcos as on March 31, 2024 (including adjusted gross revenue-related liabilities). Further, the total annual payments towards deferred spectrum liabilities for the industry, including this spectrum auction, will jump considerably as the moratorium on payments ends in September 2025, thereby exerting more pressure on the industry’s cash flows.
Although a few telcos have prepaid some of these liabilities (especially those with relatively higher interest rates), the repayment burden of the industry still remains high. There have been expectations for some sort of government support to ease this liquidity issue, especially in light of the fact that the government has repeatedly indicated that it wants a three private player market. Moreover, it has supported the sector by offering a relief and reforms package in 2021 and further support is not being ruled out.
The debt levels, which stood at Rs 6.4 trillion as on March 31, 2024, are expected to increase to around Rs 6.6 trillion by March 31, 2025, with the addition of the deferred liabilities. The debt is expected to moderate thereafter, with an improvement in profit generation and moderation in capex levels. With enhanced operating metrics following the ARPU expansion, the industry’s operating profits and debt coverage ratios are expected to improve, even as debt levels remain staggeringly high. The debt/OPBDITA is likely to improve to 3.7-3.9x and interest coverage to 3.3-3.4x for FY 2026, with further enhancement expected going forward. This is driven by expectations of an increase in operating profits once tariff hikes are implemented this year.
While a major portion of industry revenues comes from the traditional telecom segments of voice and data, telecom players have been attempting to diversify their revenue streams by increasing the non-telco business, including enterprise business, digital services, fixed broadband, cloud services and data centres, which are likely to foster future growth. Although satellite communication is evolving as a new technology, given the cost economics, it is still some time away from becoming a threat to traditional terrestrial networks.
