An estimated improvement of about 20% in the average revenue per user per month (ARPU), rung up by the twin tailwinds of recent tariff hikes and ongoing customer upgrades, could lift the operating profit, or earnings before interest, tax, depreciation, and amortisation (EBITDA), of the Indian telecom sector by around 40% over fiscal 2021 to Rs1 lakh crore in fiscal 2023, says a research note.
In the report, rating agency CRISIL says, “Improving profits along with a moratorium on government dues would provide telecom companies (telcos) room to invest an estimated Rs1.5-Rs1.8 lakh crore for 5G services over the current and next fiscals, and improve their return on capital employed (RoCE). The tariff hikes will also support their credit profiles notwithstanding higher investments.”
According to Nitesh Jain, director at CRISIL Ratings, recent tariff hikes and ongoing customer upgrades could push the sector’s ARPU by 20% to Rs160-Rs165 next fiscal from Rs135 in the previous fiscal.
“ARPU growth will lead to nonlinear growth in profitability due to the high operating leverage of the telecom sector. The sector’s EBITDA is seen surging 40% to Rs1 lakh crore next fiscal from Rs72,000 crore in fiscal 2021. Yet RoCE will be moderate at 7%-8% because of high capital intensity and adjusted gross revenue dues,” he added.
The sector’s high capital intensity is because telecom companies need to invest in technological upgradation and spectrum purchase continuously. After investing about Rs5 lakh crore over fiscals 2017-2021 to roll out 4G services, they will now need to invest towards 5G rollout before reaping returns.
CRISIL foresees investments of at least Rs70,000 crore at the 5G spectrum auctions likely next fiscal year — if the bidding is prudent.
However, it says, the four-year moratorium on government dues announced by the Union Cabinet recently could provide annual cash-flow relief of around Rs32,000 crore over the next four years to telcos that have opted for it, though it will continue to be considered as debt.
The telecom sector’s debt is estimated to rise to about Rs4.6 lakh crore this fiscal because of additional liabilities about spectrum purchased at the recent auction.
Rakshit Kachhal, associate director at CRISIL Ratings, says, “The sector’s financial leverage, as indicated by a debt to EBITDA, is expected to stay elevated at over four times this fiscal. Next fiscal, it could improve to around 3.8 times (2.4-2.5 times for the top two telcos), helped by full-year benefit from tariff hikes. While leverage will improve gradually, the credit profiles of players will continue to be supported by the high entry barriers created by large investments in strategic infrastructure such as spectrum rights, and tower and fibre assets.”
That said, CRISIL says, any intense bidding for spectrum beyond the metros and category A circles, and higher-than-expected investment in fiber-isation for 5G, could have a bearing on credit profiles.
CRISIL’s analysis is based on the top three telecom companies — Reliance Jio, Bharti Airtel, and Vodafone Idea — which account for over 90% of the sector’s revenue and its base case assumes a continuation of these three players in the business.