According to a recent report by ICRA, the telecom service providers will dial in the next round of tariff hikes over the next one or two quarters, which is likely to drive revenue growth in FY2022. In the light of higher funding requirements arising from sizeable pay-outs towards AGR liabilities, spectrum purchase, regular revenue share with the government and auction installments (which start from FY2023), it is imperative for the players to embark on sustainable and sizeable expansion in the average revenue per user (ARPU). The ARPU expansion will result in revenue growth and given the high operating leverage, the margins are also expected to expand. These measures are expected to translate into improvement in the debt coverage metrics of the industry, even as the overall debt remains high.
According to Anupama Arora, Vice President and Sector Head, Corporate Ratings, ICRA Limited, “Tariff hikes and upgradation of subscribers from 2G to 4G is expected to result in improvement in ARPU to around Rs 220 in the medium term. ICRA expects the industry revenue to grow by 11-13 per cent over the next two years, with operating margins improving to around 38 per cent for FY2022. Improvement in cash flow generation, coupled with moderation in capex intensity, would limit the dependence on incremental external borrowings for operations. However, the addition of AGR liabilities to debt and the next round of spectrum auctions would act as a dampener. ICRA expects total industry debt to remain elevated at Rs 4.7 trillion as on March 31, 2022. While some improvement is expected in the debt coverage indicators following the improvement in operating metrics, they continue to remain weak.”
ICRA notes that there is a steady restoration in the pricing power back to the telcos and the next round of tariff hikes is on the cards. A glimpse of the same was witnessed in Vodafone Idea Limited (VIL) increasing post-paid tariffs in select circles, just a few months after the introduction of new tariff plans by Reliance Jio Infocomm Limited (RJIL). India still has one of the lowest tariffs in the world, indicating enough room for increasing the same. This, coupled with the consistent increase in data usage and steady upgradation of subscribers from 2G to 4G with the proliferation of cheaper smartphones, is expected to drive revenue growth going forward. In H1FY2021, the industry AGR witnessed a year-on-year growth of 25 per cent. This was driven by an increase in industry ARPU (as reported by TRAI) to more than Rs 90 for H1FY2021, from Rs 74 for H1FY2020.
Debt continues to remain the Achilles’ heel of the industry. Although sizeable deleveraging was done in FY2020, which along with moderation in capex intensity has resulted in a decline in debt to Rs 4.4 trillion as on March 31, 2020; and though improvement in cash flow generation is anticipated, the debt levels are expected to increase further to Rs 4.7 trillion as on March 31, 2022. This is because of the accumulation of AGR liabilities in debt, in addition to the proposed spectrum auctions. Moreover, the improvement in operating metrics is likely to translate into an expansion of the debt coverage indicators. Interest coverage is expected to improve to 2.5x for FY2022 from 1.8x for FY2020 and Total debt/OPBDITA is expected to decline to 4.6x from 6.7x over the same period. Notwithstanding the improvement, the indicators continue to remain weak due to the elevated debt levels.
Further, Ankit Jain, Assistant Vice President, ICRA Limited, said, “The sector is moving towards the inflection point, wherein the next phase of growth will be driven by the non-telco businesses, which include – enterprise business, cloud services, digital services and fixed broadband services. Further, in terms of the core business, 5G, which is knocking on our doors, would be the growth driver. It has already been launched in some countries. However, given the high spectrum prices, the nascent stage of the eco-system, the relatively low penetration of 4G services and limited paying capacity of the Indian consumer, coupled with the precarious position of the balance sheets of telcos, is likely to play a spoilsport in the technology upgradation to 5G.”
