Strong Growth Momentum: Analysts’ views on the state of the telecom sector

The telecom sector made significant headway during 2023, with 5G penetration deepening, network capacity increasing and digital infrastructure expanding. The most notable development during the year was the passing of the Indian Telecommunications Act, 2023, which is set to replace some of the previous acts. Industry analysts share their views on the sector’s performance in 2023, the momentum of 5G roll-outs and the likely impact of the Indian Telecommunications Act, 2023 on the industry….

How has been the telcos’ performance in terms of financial growth, tariff movement, subscriber additions and ARPUs in 2023?

Ankit Jain

ICRA expects the telecom services industry to report moderate revenue growth of 7-9 per cent in financial year 2024 over financial year 2023owing to muted ARPU expansion in the absence of tariff hikes in the near term. 5G network deployment has picked up pace in the recent past and telcos have been expanding their 5G services in select pockets, as estimated by ICRA earlier. However, in the absence of any 5G-specific plans, its monetisation appears protracted. The roll-out entails densification of the network and sizeable deployment of fibre, which is likely to increase the capex intensity in the near  to medium term. This would keep debt levels elevated at around Rs 6.3 trillion as on March 31, 2024, with slight moderation to Rs 6.1 trillion as on March 31, 2025 (in the absence of any spectrum auctions).

Benoy C.S.

The Indian telecom market is gradually moving towards a duopoly. The subscriber base of all operators, except Airtel and Jio, is decreasing consistently on a quarter-on-quarter basis. According to the Telecom Regulatory Authority of India (TRAI), from January to October 2023, Airtel increased its subscriber base by 3 per cent while Jio experienced a 6 per cent growth in the same period. Based on Frost & Sullivan’s analysis, by the end of 2023, Airtel’s market share was expected to be around 34 per cent, and Jio’s market share will be close to 41 per cent. Both Vodafone Idea Limited (Vi) and Bharat Sanchar Nigam Limited (BSNL) have seen a decline during this period. BSNL, which had a share of close to 9 per cent at the beginning of the year, is expected to see a reduced share of 7.5 per cent by the end of the year.

According to TRAI data, in the first half of 2023, there was a marginal increase in wireless ARPUs, from Rs 141 to Rs 145. Following this trend, it can be inferred that in 2023, ARPUs increased by almost 5 per cent compared to 2022. India’s telecom tariffs are still among the lowest in the world as a percentage of per capita gross national income. In 2024, Frost & Sullivan anticipates a growth of 10-12 per cent in ARPUs, driven by both increased usage and adjustments in tariff rates.

Swapnil Srivastava

In terms of the sector’s financial performance, a moderation in headline growth has been observed. The top-line growth hit its lowest since calendar year 2019 at 8 per cent year on year during the nine months ended calendar year 2023, attributed to heightened competition post-5G commercialisation and the absence of significant tariff hikes since December 2021. The monthly subscriber growth was subdued, expanding by less than a million to reach 1.2 million by the end of October 2023, the lowest since June 2023. Shoring up ARPUs is a primary concern for all telcos. Further strides are necessary, targeting an ARPU range of Rs 270-Rs 300 over the next three years, up from the current Rs 140-Rs 200, for 5G investments to be realised.

On a positive note, the industry’s profitability has recovered, with aggregate earnings before interest, taxes, depreciation and amortisation margins expanding by 130 bps to 50.6 per cent during the nine months ended calendar year 2023, driven by operating leverage and benefits from reduced spectrum usage charges. The momentum needs to continue for more robust growth, especially for innovative 5G use-case implementation.

What are your views on the recently passed Indian Telecommunications Act, 2023? What are the key issues that remain unaddressed?

Benoy C.S.

The recently passed Indian Telecomm­unications Act, 2023 is a welcome move. It has been long overdue as it replaces some of the old acts such as the Indian Telegraph Act (1885), the Wireless Telegraphy Act (1933) and the Telegraph Wires (Unlawful Possession) Act (1950). The telecom sector has undergone significant changes in the past decade and a new reformed law was inevitable. The industry was eagerly waiting for this regulatory overhaul.

The new act addresses some crucial aspects that required immediate attention. Some of the changes that will have a lasting impact include:

• Technology neutrality: The new act allows the central government to facilitate the utilisation of spectrum in a flexible, liberalised and technologically neutral manner. This aspect fosters a level playing field for different technological solutions by ensuring that the government does not impose restrictions based on specific technologies.
• Facilitation of research and innovation: The new act provides the government with the right to administratively assign spectrum for scientific research, satellite communication, national security, disaster management and testing for emerging technologies through regulatory sandboxes, etc. As we all know, it will not be feasible for research entities to obtain spectrum through auction for these activities. The central government is now empowered to create regulatory sandboxes to encourage innovation and technological development, allowing the testing of new concepts in controlled environments, and the granting of exe­mptions, allowances or time-bound exc­eptions. Hence, this new act will accelerate technology innovation and empower the start-up ecosystem.
• Curbing spam: The rise of spam has been a significant irritant for all users, lately. The new act empowers the government to prescribe measures for protecting users from message advertising or promoting goods and services. Recommended measures include obtaining prior consent, preparation and maintenance of “Do not disturb” registers and a mechanism for users to report malware or any unsolicited messages.
• Simplifying the RoW approval process: The act clears the regulatory barriers for right of way (RoW) in private properties and urges all public entities to give permission expeditiously, within prescribed timelines. Rejection of an application by a public entity requires reasonable grounds recorded in writing. This will significantly help accelerate the fiberisation drive in the country, eventually improving the quality of service (QoS). This has been a long-standing demand of all telecom service providers and passive infrastructure companies.
• Right to intercept: In the interest of public emergency and public safety, the new act grants broad discretion to the government to intercept and monitor any message or class of messages to or from any person.

While all these modifications empower the government in facilitating transformation, it is extremely important to put in place enough checks and balances to prevent misuse by power centres.

To maintain an equilibrium and expedite further growth in the sector, a strong third service provider is required. This would instigate healthy competition”
Benoy C.S.

Swapnil Srivastava

The Indian Telecommunications Act, 2023 signifies a positive leap in our quest to enhance regulatory efficiency and modernise the Indian telecom landscape. The administrative allocation of spectrum for satellite broadband services is a pragmatic step, aligning India with global norms and fostering healthy competition for improved connectivity in underserved regions. The replacement of the Universal Service Obligation Fund with Digital Bharat Nidhi is forward-thinking, broadening its scope for research and development (R&D), particularly in shaping India’s contribution to emerging technologies such as 6G, edge, cloud, etc. Furth­ermore, the act’s clarity on the RoW rules resonates with the industry demand, as it streamlines the telecom infrastructure development process, contributing to enhanced efficiency and connectivity.

While acknowledging these positives, the act does have some areas that need attention. Future amendments, through mutual consultation, can address issues such as determining the regulatory status of over-the-top apps, aligning exemptions to government interception of encrypted messages with constitutional privacy rights and clearly defining the national security issues that can trigger government takeover or suspension of telecom networks. I am confident that various agencies such as the telecom ministry, industry bodies, telecom operators and different stakeholders will work together collaboratively to address these issues in the future.

What is your view on the momentum of 5G roll-outs in India? What further steps should telcos take to ensure that 5G connectivity reaches both rural and urban areas?

Ankit Jain

The three private sector telcos (Bharti Airtel, Vodafone Idea and Reliance Jio) have together achieved almost 80 per cent penetration of 4G subscribers (more than 820 million 4G subscribers as on September 2023) and thus, the upgradation of subscribers has largely plateaued. Moreover, the 5G services launched by the telcos have not been monetised and there are no 5G-specific plans, which could otherwise have boosted ARPU levels. These factors, combined with the absence of tariff hikes, are likely to result in a moderation in ARPU growth. ICRA expects industry ARPU to improve to Rs 182-Rs 185 in FY2024 from Rs 175 in FY2023. Consequently, the industry is expected to report a year-on-year revenue growth of 7-9 per cent in FY2024, translating into a 9-11 per cent expansion in operating profit before interest, depreciation, taxes and amortisation (OPBIDTA) vis-a-vis that in FY2023. Industry-consolidated revenues are expected to be at around Rs 2.9 trillion-Rs 3 trillion with an OPBIDTA of around Rs 1.5 trillion-Rs 1.6 trillion for FY2024. The revenue and OPBIDTA growth, thereafter, is anticipated to be led by the next round of tariff hikes and monetisation of 5G services, along with growth in the non-telco business.

Increasing diversification with higher revenue share from enterprise businesses, digital
services, fixed broadband services, cloud services and data centres is likely to foster future growth.”
Ankit Jain

Benoy C.S.

The 5G roll-outs in the country are progressing smoothly according to the plan. According to Reliance Industries Limited’s (RIL) Q1FY24 presentation, Jio has deployed over 115,000 5G sites and nearly 690,000 5G cells across India. Airtel claims its 5G Plus network is live in 3,000 cities and towns.

While Jio and Airtel have met the targets for high-frequency bands, their major deployments have been on mid-frequency bands. Currently, Jio is rolling out 5G utilising mid-band (3300-3600 MHz) and 700 MHz, and Airtel is using 1800 MHz in combination with mid-bands.

The lower frequency bands have a limited range and are more easily obstructed by obstacles like buildings. This could be one of the reasons for the inferior QoS in 5G. In many places, the quality of network services has dropped significantly, leading to call drops and other network-related issues. Challenges include low tower densities, low level of fiberisation, constant shifts between 4G and 5G, and network vacuums.

To experience the true potential of 5G services, much needs to be done. Achieving comprehensive coverage requires many more small cell towers, often positioned much closer together. This implies that telecom companies need to increase their spending to address these issues.

Swapnil Srivastava

It is exciting to see the rapid 5G roll-outs since the launch of services in October 2022. Currently, the network is spread across 738 districts with over 400,000 base transceiver station deployments, earning India the distinction of being a world leader for its pace of roll-outs – a feat lauded by many global industry organisations as well.

However, despite the commendable progress in network roll-out, there is a need for specific measures to accelerate 5G connectivity growth. First, expanding 5G use cases is crucial, especially with 5G fixed wireless access (FWA) offering a transformational potential. To make it viable, costs need to be reduced from $200 to $100 – a goal supported by government initiatives such as the production-linked incentive and recent launches of indigenously developed customer premises equipment (CPE) products from Indian players. Second, while amendments to the Indian Telegraph RoW rules are beneficial, regulations facilitating infrastructure sharing such as the 2021 DoT amendment allowing active infrastructure sharing, are crucial for capital-efficient deployment. Third, addressing backhaul challenges, particularly India’s sub-optimal tower fiberisation (about 33 per cent), requires leveraging satellite for mobile backhaul and E/V spectrum bands, supported by the recent telecommunications bill. These targeted measures, coupled with collaborative efforts among stakeholders, will lay the groundwork for widespread 5G adoption across Indian cities, towns and villages.

With these changes, 5G uptake is expected to increase. The industry forecasts are quite positive, indicating a surge from 130 million 5G subscriptions in 2023 to nearly 900 million by 2029.

This unprecedented pace of growth is, indeed, exciting.

“The Indian Telecommunications Act, 2023 signifies a positive leap in our quest to enhance regulatory efficiency and modernise the Indian telecom landscape.”
Swapnil Srivastava

What are your thoughts on the changing dynamics in the towerco space in India?

Ankit Jain

On the tower industry front, there have been a few transactions in the past few quarters, resulting in industry consolidation, with the emergence of two large players (Data Infrastructure Trust and Indus Towers) with more than 450,000 towers combined. ICRA had revised the outlook for the telecom tower industry to negative from stable earlier this year, as the industry was facing headwinds in the form of elongated receivables on account of delays in payments by some telecom service providers, thus leading to moderation in the liquidity profile of the telecom tower industry and increased reliance on external debt. As per ICRA, the gross receivable days are likely to remain above its outlook revision threshold of 80 days.

Benoy C.S.

The towerco segment in India is currently going through a challenging phase. Consolidation in the sector has significantly impacted the growth of this industry.

On the one hand, with the roll-out of 5G, there is a natural increase in demand for a greater number of towers and extended coverage. On the other, as the Indian market transitions to a duopoly structure, towerco companies are experiencing immense margin pressure.

This is evident in the slower deployment of towers, with net additions for almost all tower companies declining on a year-on-year basis. Currently, there are approximately 750,000 towers in India. To make India 5G ready, we might require at least 1,200,000 towers, indicating a latent potential for growth.

The industry is also moving towards greener infrastructure. Significant strides are being made to harness natural resources and reduce the reliance on diesel.

Swapnil Srivastava

As a frontrunner in global passive infrastructure sharing, India’s towerco business model has been a game changer. Recent market shifts have redefined industry dynamics. With the ascent of 5G, Indian towercos are poised for sustained revenue growth, fuelled by 5G loading, macro-site additions and the deployment of small cells. The ongoing 4G expansion in Tier II and Tier III cities is further bolstering tenancy additions.

However, despite these changes, competitive intensity is holding steady as no towerco is willing to lower rental rates for market share gains. Looking ahead, I foresee the Indian towerco market embarking on a new growth phase, characterised by 5G-driven infrastructure sharing, a focus on tower fiberisation and small cells, and increased investments in non-core domains such as edge computing, smart cities, internet of things and electric vehicle charging. This marks an exciting journey of innovation and expansion.

What is your outlook for the telecom industry for 2024? What should be the key priorities and focus areas for telcos during this year?

Ankit Jain

ICRA expects the telcos to front-load the 5G-related capex in financial years 2024 and 2025, causing the capex intensity to peak during this period and moderate thereafter. The industry has been upfronting 5G capex and ICRA foresees the industry to spend around Rs 3 trillion over the next four to five years. While there has been a roll-out of 5G networks with around 400,000 5G sites being deployed, there are no retail-based use cases that compel users to upgrade their handsets to 5G.

Amidst this capex, ICRA expects the total debt levels of the industry to remain unwieldy at around Rs 6.3 trillion as on March 31, 2024. While the increase in deferred spectrum debt resulted in a moderation in debt metrics in financial year 2023, the debt/OPBDITA is subsequently estimated to improve to about 4.3x and interest coverage to about 2.9x for financial year 2024. Further improvement is expected in financial year 2025 with debt/OPBDITA estimated at 3.6-3.8x and interest coverage at 3.0-3.1x, owing to a steady uptick in operating metrics, even as the debt levels remain elevated (assuming no spectrum auctions).

The next phase of growth may kick in for telcos once more subscribers join the 5G bandwagon and telcos monetise this by releasing 5G-specific plans. Moreover, the next round of tariff hikes will also provide a fillip to industry ARPUs and thus, the profitability and return metrics of the telcos. Parallelly, increasing diversification by way of higher revenue share from enterprise businesses, digital services, fixed broadband services, cloud services and data centres is likely to foster future growth.

Benoy C.S.

With a subscriber base exceeding 1.18 billion, the Indian telecom industry is the second-largest industry in the world. The overall teledensity in India has reached nearly 85 per cent. The teledensity in the rural market is still in the range of 58 per cent, indicating substantial growth potential in the subscriber base. The average monthly data consumption per wireless data subscriber is in the range of 18 GB, which is one of the highest in the world.

According to GSMA, India is poised to become the second-largest smartphone market worldwide by 2025, with app­r­o­x­i­m­a­­tely 1 billion installed devices. By that time, India is expected to have around 920 million unique mobile subscribers, with cl­ose to 10 per cent utilising 5G connections.

To maintain an equilibrium and expedite further growth in the sector, a strong third telecom service provider is required. This would instigate healthy competition. Regulatory agencies must take cognisance of this need and encourage more foreign direct investment, while facilitating increased investment in the sector. The government should also streamline regulatory hurdles to foster the growth of passive infrastructure.

In contrast, telecom companies need to concentrate on expanding their coverage and enhancing QoS. Accelerating the deployment of 5G, particularly in high-frequency mm wave bands, is crucial for improving coverage. At an industry-wide level, the telecom sector should invest in R&D, foster innovation and promote skill development in relevant fields to create a healthy ecosystem for the growth of 5G. Telecom companies should also innovate simultaneously to roll out numerous 5G-enabled services for the enterprise segment. Significant efforts should be made to increase fibre coverage throughout India.

Swapnil Srivastava

Looking into 2024, a crucial recalibration for telcos is expected post the substantial $20 billion (about Rs 1.6 trillion) investments in 5G networks. With network roll-outs expected to be complete early in the year, priorities need to shift to innovative tariff structures and robust cost recovery plans. Despite a somewhat flat smartphone market, the impressive 58 per cent share of 5G shipments in the third quarter of financial year 2023, totalling 25 million units, offers a promising scenario for innovative services. Making affordable 5G phones, costing around Rs 10,000, more accessible should be a key priority, potentially accelerating adoption. Collaborative efforts between telcos and original equipment manufacturers for innovative billing plans can enhance accessibility.

Reinforcing FWA services’ expansion by leveraging scale efficiencies to reduce CPE costs is critical. Strategic collaborations with Indian towercos to optimise capex deployment for densifying 5G networks, especially through small cells, are imperative. The industry anticipates a continued favourable regulatory landscape, supporting seamless infrastructure roll-out.