Ankit Jain, Vice President and Sector Head, Corporate Ratings, ICRA Limited

The Indian telecom industry faced headwinds in terms of revenue generation and profitability after the launch of services by Reliance Jio in 2016, which resulted in a period of tepid cash flow generation against elevated debt levels. In­tense competition forced the telcos to consistently revise their tariffs downwards, which manifested into one of the steepest falls in the industry ARPU, depressing the industry adjusted gross revenue (AGR) to Rs 250 billion-Rs 280 billion for around six to seven quarters during financial years 2019 and 2020. Thereafter, the Supreme Court’s order on the definition of AGR ad­ded to the woes of the industry. These events led to consolidation in the Indian telecom services industry.

Since then, the telecom services in­dustry has been treading on a steady path to recovery. The tariff hikes implemented by industry participants, coupled with a 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 for FY2023 and more than Rs 200 for FY2025, from the lows of arou­nd Rs 106 during FY2019. The increase in ARPU levels is likely to translate into a growth in the industry op­erating income by 12-14 per cent and op­erating profits by 17-19 per cent in FY2023, given the operating leverage. The industry AGR impro­ved to around Rs 490 billion for the first quarter of FY2023, indicating a 20 per cent year-on-year growth. This growth is likely to con­ti­nue in the medium term, dri­ven by the increasing usage and addition of 4G subscribers. The proliferation of cheaper sm­artphones, coupled with re­la­tively low data tariffs despite the tariff hi­kes, also aids the conversion of subscribers to 4G. Owing to these factors, India has one of the highest data consu­mptions per subscriber per month across the world, next to the Gulf countries.

The industry revenues are likely to be around Rs 2.6 trillion-Rs 2.7 trillion for FY2023, with operating margins inching towards the 50 per cent mark. In FY2022, the industry operating margins increased to 48 per cent from 44 per cent in FY2021, driven by an improvement in ARPU as well as reduction in interconne­ct usage charges. The partial impact of lo­w­er spectrum usage charges (SUC) (there was no SUC on the spectrum purchased in latest spectrum auction) coupled with a steady ARPU increase is likely to result in a further margin increase in FY2023. This will also help improve the industry’s re­turn on capital employed to around 8 per cent for FY2023, despite the addition of 5G spectrum.

The Indian telecom services industry is on the brink of a technology upgrade to 5G. In the recently concluded auctions, telcos bought spectrum worth Rs 1.5 trillion for developing 5G capabilities along with plugging other gaps. While the up­front payment was low, given the 20-year elongated payment plan, this auction added debt on the books of the industry in the form of deferred spectrum debt. ICRA expects industry debt levels to in­crease to around Rs 6 trillion by March 31, 2023, before moderating to Rs 5.6 tri­llion by March 31, 2025. The telcos ha­­ve been focusing on deleveraging – Bh­a­­rti Airtel concluded its first call of the rights issue of Rs 210 billion and collected 25 per cent as upfront payment in Oc­tober 2021, while Vodafone Idea is scouting for a fundraiser.

The debt levels remained unwieldly, exerting pressure on the debt coverage metrics. However, ICRA expects the debt metrics to improve steadily going forward, given its expectations of improved profit ge­neration. The total debt/operating profit before depreciation, interest, taxes and amor­tisation is expected to increase 4.6x for FY2023 with the addition of deferred spectrum liabilities, before improving around 3.6x by FY2025, while the interest coverage is likely to improve 3.1x for FY2025 from 2.8x expected for FY2023.

5G deployment will entail the densification of the network and close place­me­nt of radio antennas, with possible co­llo­cation on street furniture. While small cells are likely to be the initial choi­ce the­se need to be connected with fibre for effi­cient network coverage and delivery. India currently has 30-35 per cent of its towers fiberised. It would re­quire a sizeable capex to fiberise an adequate level of towers. However, unlike 4G, ICRA expects the 5G launch to be more phased and specific to areas that will yield heal­thy returns. Furthermore, since several use cases are under development, it will take some time for 5G to re­a­ch adequate levels of penetration. To be­gin with, it will be more focused on en­t­er­­prise-based use cases. The total in­dus­try capex, as per ICRA expectations, is likely to be around Rs 3 trillion over the next four to five years.

In the core business, the technology upgrade to 5G is likely to drive growth going forward, along with the upgradation of a large pool of subscribers to higher technology, while non-telco businesses, which include the enterprise business, cloud services, digital services and fixed broadband services, will also remain crucial in charting a growth path for the industry.