The current fiscal year, 2023-24, will see key technological shifts in the telecom industry. The two leading service providers, Reliance Jio and Bharti Airtel, have already launched 5G services and they will roll out 5G coverage to most parts of the country. There will also be some scale-up of satellite broadband services. Meanwhile PSU Bharat Sanchar Nigam Limited (BSNL) promises to roll out long-delayed 4G services to its substantial 2G/3G subscriber base and Vodafone Idea (Vi) will look for fresh investments to keep the company alive and competitive.
Logically this means there will be large capital expenditure requirements from the leading telecom service providers, which are well into the cycle of 5G roll-outs. Vi will start rolling out 5G if it can arrange the requisite financing. There is also a wild card in the form of the Adani Group, which has taken 5G licences but very little spectrum. Reliance Jio claims that capital expenditure will start tapering off in the latter half of FY2024 and Airtel projects that its capital intensity will ease in FY2025.
Industry watchers say the new technology will empower new revenue streams in FY2024. 5G consumer uptake is unlikely to be very high, and 5G tariffs are also unlikely to be meaningfully different from current 4G tariffs until the second half. But enterprise usage of the 5G platform will surely give rise to new revenue streams and, according to an assessment by Ericsson, India 5G subscriptions are expected to reach the 500 million mark by 2027, with a penetration of about 40 per cent.
It is also likely that service providers will be able to raise overall tariffs and they are hoping to gain from 2G subscribers upgrading to at least 4G, with a consequent increase in data usage. This trend is already apparent in the FY2023 results.
The upgrade from 2G to 4G is supporting the strong data consumption story playing out. The total data consumed across the top three operators combined grew by 17 per cent year on year. The average data consumed per user per month across the top three operators stood at almost 21 GB for the quarter ended December 2022. This growth is underpinned by the continued migration from 2G to 4G, which amounted to around 31 million 4G data users being migrated up in FY2022. The healthy data consumption, supplemented by the rapid uptake of 5G, is expected to lead to increased demand for passive infrastructure.
The financial results of the previous fiscal (2022-23) indicate that the sector is in danger of becoming a telecom services duopoly, which is good for the two companies in question, but probably not ideal for the sector’s long-term health. Right now, the two market leaders have each other to contend with and neither will, therefore, be in a position to take its foot off the accelerator when it comes to innovation and roll-outs. But any further lowering of competitive intensity would make it easier to raise tariffs, and might also lead to a slowdown in terms of service innovation.
Jio and Airtel have a big lead over Vi, with the duo declaring good results and running neck and neck. While Vi’s financial situation remains perilous, there are news reports that it may be able to raise sufficient funding to establish a presence in 5G. It is also worth looking at Indus Towers, since it is a key player when it comes to hosting physical infrastructure. Meanwhile, the PSU presence is far behind, with BSNL yet to offer 4G coverage across most regions.
Quite apart from mobile services, Jio and Airtel have a significant, growing presence in fibre-driven broadband to the home as well as enterprise services, alongside DTH and associated services. Both companies have pushed hard to grow their enterprise divisions. Moreover, Jio is looking to leverage the Reliance Group’s presence in retail. Airtel is also looking to use artificial intelligence and data mining to figure out ways to create new revenue streams.
While, of course, 5G has huge long-term possibilities when it comes to building new revenue streams, industry analysts feel that it will take a while before enterprises develop new services that can truly exploit the superfast 5G platform. At the retail consumer level, no more than 10-15 per cent of all handsets are 5G enabled (maybe one-third of post-paid users own 5G-capable handsets). In a recent management interaction, Airtel estimated that it would not see more than 20 per cent of subscribers upgrading to 5G immediately.
Vi has not started its 5G roll-out yet; it has a very large chunk of low-end 2G subscribers, and it has no presence in fixed broadband. If it can retain 2G subscribers and convert them, it could actually see a sharp uptick in ARPUs. All three private service providers have succeeded in raising ARPUs in FY2023. But they all continue to worry about low ARPUs.
The market is growing very slowly in terms of subscribers, with around 84 per cent teledensity. As of February 28, 2023, urban teledensity was around 133 per cent, but there was scope for rural growth where teledensity was around 57 per cent. Service providers can hope for fast subscriber growth only in rural areas, unless they can win over customers from competitors. They can, however, hope to generate better ARPUs from existing customers.
This could explain the two-pronged strategy wherein, for example, Airtel is focused on the top 150 towns where it presumably hopes to gain in terms of ARPUs and also on 60,000 potentially high-growth rural areas where it hopes to improve penetration and pick up new subscribers.
As of February 2023, Jio was the largest telecom operator, with a total of 427.18 million users. Airtel followed with 369.87 million subscribers while Vi had 237.96 million subscribers. BSNL was in fourth place with 104.19 million subscribers. In terms of revenue market share (as of December 2022), Jio held first spot with 41.1 per cent while Airtel had 36.12 per cent and Vi was far behind with 16.8 per cent share.
A brief look at the financial results for FY2023 and the attendant management commentary…
Reliance Jio Platforms
Jio declared a consolidated revenue of Rs 1,151 billion in financial year 2023 with operating profits (EBITDA) of Rs 487 billion and net profits of Rs 191 billion. This indicated a healthy growth in revenue from operations, led by a tariff hike plus the ramp-up of wireline broadband services and the addition of 29 million subscribers for mobility services. The strong EBITDA growth is on account of higher revenue and a steady improvement in margins. The telco’s ARPU stood at Rs 178.80 at the end of financial year 2023 versus Rs 167.60 at the end of financial year 2022.
Jio has extended the coverage of its “True5G” services to over 2,300 cities and towns across India and hopes to complete its pan-Indian roll-out by December 2023. The free streaming broadcast of the IPL proved very popular and registered a high viewership. Side by side, it has rolled out home broadband with bundled entertainment packages. It targets 100 million fibre plus 5G connected homes.
Jio claims that the 5G roll-out is powering many differentiated offerings. By the end of calendar year 2023, Jio could claim to possess perhaps the best 5G network in the world. It is seeing a sharp uptake in data usage where 5G adoption is strong, and it could expect ARPU gains from data consumption alone. Its 5G fixed wireless access (FWA) broadband-to-home and enterprise offerings are also powering many software services and having a transformational impact on mobility at home as well as in enterprises.
Bharti Airtel
Bharti Airtel delivered encouraging fourth quarter (FY2023) and FY2023 results. In India, Airtel’s FY2023 revenues stood at Rs 1,391 billion, with EBITDA at Rs 713 billion and profit after tax (PAT) of Rs 83 billion. The blended ARPU from broadband plus mobile was close to Rs 193 (up 18 per cent year on year). Airtel managed to hike entry-level prepaid base tariffs to Rs 155 from Rs 99 and also gained 9.4 million subscribers in FY2023.
Airtel claims it is now running 5G in over 3,500 towns – that is, about half of the total intended coverage. Around one-third of post-paid customers (roughly 10 per cent of mobile users) have 5G-enabled handsets and 5G handset penetration is expected to rise to 24 per cent, but the company does not expect 5G uptake to be more than 15-20 per cent until 5G-driven software and allied services catch up with the new platform. Meanwhile, Airtel Africa delivered FY2023 revenues of $5.25 billion (constant currency growth of 17.5 per cent) with an EBITDA of $2.6 billion and PAT of $750 million. Total subscribers grew by nearly 12 million to 140 million and the year-end ARPU stood at $3.1.
The company’s capex intensity was high at Rs 341 billion for FY2023 (including Africa), versus Rs 257 billion in FY2022. The expectation is that capex intensity will be about the same in FY2024 and taper in FY2025. The company is targeting the top 150 towns and is also focused on 60,000 high-potential rural areas. Airtel sees a lot of opportunity in areas such as internet of things, communications-platforms-as-a-service and cybersecurity. The free cash flow for India was at Rs 140 billion for FY2023 and is expected to rise sharply in FY2024 to around Rs 215 billion.
Indus Towers
The infrastructure provider reported revenues of Rs 287 billion in FY2023, with an EBITDA of Rs 101 billion and PAT of Rs 27 billion. It will benefit from the roll-out of 5G and the deployment of 5G infrastructure. More than 140,000 5G base transceiver stations (BTSs) have been deployed across the country, with the weekly run rate increasing from 5,000 BTSs in December 2022 to 7,000 in March 2023. The total towers and co-locations at the end of the fourth quarter were 192,874 and 342,831 respectively. The tenancy ratio dipped marginally from 1.79 to 1.78 but continues to be industry leading. The company claims that 5G loading has started to add to revenues and it should increase in the form of requirements for additional sites as the penetration and capacity needs of 5G services increase.
Free cash flow for FY2023 stood at Rs 14 billion, but this was impacted by the shortfall in collections during the year from a major customer (Vi). In the fourth quarter, collections saw an improvement, but Indus carries a provision for doubtful debt of Rs 54.5 billion related to this. Vi owes nearly Rs 70 billion to Indus.
Vodafone India
The ailing telecom services major is still seeking policy support and looking actively for a new investor. The government’s willingness to offer a moratorium on AGR and spectrum dues for four years and to convert Rs 161 billion of debt into equity has helped. So has the Vodafone-Idea merger, which enabled significant synergies. But the company is still cash strapped and has seen steady attrition of its subscriber base to its two more successful rivals.
The positives are that Vi could benefit from a large number of 2G subscribers who may be looking to upgrade to 4G, which would be a big driver for ARPU growth. Its subscriber base of 237 million saw a loss of 16 million users in the fourth quarter and it has only 116 million 4G users. In the first nine months of FY2023, Vi declared a revenue of Rs 318.6 billion with a net loss of Rs 228.7 billion. However, if the financing costs (Rs 183 billion) and depreciation (Rs 173 billion) are excluded, Vi would have made an operating profit of Rs 127 billion. This is an improvement on FY2022, when it had an EBITDA of Rs 113 billion.
The overseas parent, Vodafone PLC seems to have no intention of a further equity infusion, and the Kumaramangalam Birla Group (which owns a stake in the company due to the Idea merger) has also been reluctant to subscribe to the equity. In its latest financial releases, Vodafone PLC has written down the value of Vi to “zero”. Hence, hoped-for investments of Rs 50 billion-Rs 70 billion from the promoters have been delayed.
However, Birla has returned to sit on the board of Vi, which may indicate that the group will look at fresh infusions. The telecom secretary says there is a chance of a revival plan, with funding for a 5G roll-out starting in June coming from Indian lenders. There is market speculation of a possible investment from one of the Middle Eastern nations, given that the Emirates Telecom Group has recently increased its stake in Vodafone PLC.
Conclusion
The trends in the industry can be summarised as follows.
Jio and Airtel continue to steadily gain market share at the expense of Vi and BSNL. The two leading operators are energetically rolling out 5G networks and hope to level off the required capex by the end of FY2024. Vi is struggling and cannot compete without significant equity infusion, which it may or may not receive. BSNL is very far behind. For both Vi and BSNL, apart from financial support, the operational model has to involve retaining subscribers and persuading 2G users to ramp up to data-driven services on 4G and ultimately 5G. Satellite broadband capacities could extend the data footprint into inaccessible areas and aid in providing backhaul for 4G services.
The 5G roll-out could add significantly to revenues for passive infrastructure providers such as Indus Towers. The Adani Group remains a wild card since it has access to the necessary resources to enable a fast ramp-up of 5G. While 5G uptake has been on expected lines so far, the full power of 5G and its revenue generation ability will not be visible until services built on the platform take off and until the 5G subscriber base hits critical mass.
Devangshu Datta
