Nitesh Jain, Director, CRISIL Ratings Limited

The telecom sector appears to be finding its feet slowly, indicating the worst may be behind it. Data usage per subscriber per month has reached around 14 GB compared to approximately 12 GB before the pandemic, and is expected to rise to 15-16 GB next fiscal, perhaps amongst the highest globally. Despite this, the monthly average revenue per user (ARPU) of telcos remained suboptimal at approximately Rs 135 as of fiscal 2021, while the return on ca­pital employed was less than 5 per cent. This is because of the blow that landed on th­em towards the end of calendar 2019, wh­­­en the government demanded adjusted gross revenue (AGR) dues of over Rs 1.2 trillion.

The sector has been in repair mode sin­ce then, revising tariffs selectively to im­prove ARPU. However, it has held back on another round of broad-based tariff hikes for the prepaid segment, the last being in December 2019.

The tariff hike could now happen by the end of this fiscal, as the pandemic’s im­pact wanes. This, coupled with surging data consumption, could result in ARPU inc­reasing to Rs 145 this fiscal and, factoring the full-year benefit, to Rs 160-165 in the next fiscal.

That said, overall wireless subscribers could decline marginally from around 1.18 billion last fiscal to around 1.17 billion this fiscal, primarily because of dual SIM consolidation in urban areas. Next fiscal, however, the subscriber base is expected to inc­rease to 1.18-1.19 billion, driven by a surge in underpenetrated rural areas and marginal growth in urban areas.

As a result, while the sector’s revenue is expected to grow only 5-6 per cent year on year to reach Rs 2 trillion this fiscal, the growth rate should double to 12-13 per cent next fiscal, aided by higher ARPU as well as subscriber base.

Given the high operating leverage in the sector, the consolidated earnings before interest, taxes, depreciation and amortisation (EBITDA, or operating profit) of the top three telcos (accounting for over 90 per cent market share) should jump around 40 per cent between fiscals 2021 and 2023 to reach over Rs 1 trillion. Their EBITDA had already improved by around 35 per cent year on year to around Rs 720 billion in fiscal 2021, owing to the tariff hike in December 2019. The higher EBITDA will support investment in 5G mobile service networks over the medium term.

The transition to 5G will need the players to step up capex for acquiring 5G spectrum, although advanc­­ed technology will mean a moderate incremental expenditure of Rs 500 billion-Rs 550 billion per annum over the medium term on network equipment. Telcos will likely adopt a calibrated ap­p­roach initially and buy 5G spectrum only in metros and Category A circles, whe­re data consumption is higher compared to other circles.

The union cabinet has thankfully provided a four-year moratorium on government dues. Still, a material increase in the cash flows of telcos has become imperative before rolling out 5G mobile services and dialing up returns.

CRISIL Ratings believes the moratorium will provide cash flow relief of around Rs 1.35 trillion (around Rs 850 billion on interest and the balance on principal) to the top three telcos over the next four years. However, given that the moratorium is an interest-bearing deferral and not a waiver, the impact on balance sheets of telcos will be neutral.

Other measures announced by the union cabinet are expected to ensure optimised use of resources, increase accessibility and enable accelerated investments in the telecom sector. These include longer te­nure of spectrum licence, no spectrum usage charge (SUC) payment for future auctions, removal of SUC for spectrum sharing, 100 per cent foreign direct investment under the automatic route, rationalisation of interest rate on delayed payment of licence fees and SUC, and the removal of non-telecom revenues from the calculation of AGR. Overall, a more sure-footed run-up looms.