India’s telecom services industry started to witness tailwinds led by the relief package announced by the government, which was followed by the tariff hikes announced by telecom operators, and as a result, ICRA has revised its outlook on the telecommunications services industry to ‘stable’ from ‘negative’.
The latest round of price hikes, in which telecom operators raised prices by approximately 20% across all plans in the prepaid segment, has the potential to increase telecom operator EBITDA by approximately 28-30% for FY2023 and should result in increased cash flow generation.
Average revenue per user (ARPU) for the industry (excluding BSNL) is expected to improve to around Rs. 170 by the end of FY2023. ICRA expects revenue from the industry grow by 18-20% in FY2023, followed by 10-12% growth in FY2024, which given the high operating leverage, should result in a healthy expansion of operating profits. grow by ~30% in FY23. These will likely translate to ~8-10% ROCE for FY23 for the industry.
In addition, the recently announced PLI program will provide financial incentives to promote the manufacturing of telecommunications and networking products in India. It is estimated that this program leads to significant domestic production as well as the export of these products to other geographic areas. Furthermore, this scheme is designed to attract large investments and generate huge direct and indirect jobs.
In the past, the industry has gone through a turbulent phase with intense competition leading to pressures on revenues and profitability, and inflated debt levels, which were exacerbated by the Supreme Court verdict on adjusted gross revenues (AGR). The intense competition has resulted in one of the biggest drops in ARPU in the industry, translating into a drop in the industry’s AGR.
The green shoots of recovery began as the industry rolled out steep price hikes beginning in December 2019, the first of their kind in a long time, which pointed to restoring the pricing power of telecom operators and improving cash flow generation. This, coupled with a steady upgrade of subscribers to 4G from 2G, has resulted in steadily improving ARPU levels.
As these green shoots grew, the tailwinds began over the past 3-4 months as the industry experienced structural changes, including a series of reforms and relief measures proposed by the government accompanied by a series tariff increases.
As part of the relief plan, the government has provided a moratorium on AGR and spectrum auction rights for four years. According to ICRA estimates, this moratorium provides an annual cash flow bailout of around Rs 40,000 crore for the industry until FY 2025. In addition, the Department of Telecommunications (DoT) has released a large amount of bank guarantees (BG) from telecom operators for license fees and spectrum usage fees, after the government reduced the BG requirement by 80% under the relief scheme, which will improve the financial flexibility of telecom operators in the future.
Other notable reforms include streamlining the definition of AGR to exclude non-essential revenue, removing spectrum usage fees (SUC) for future spectrum auctions, and removing the BG requirement for deferred payments for future auctions and increasing the duration of spectrum allocation for future spectrum auctions. at 30 years old.
Even after these reforms, the industry is demanding a reduction in levies, in particular license fees, which represent 8% of the AGR. Of this amount, 5% goes to the Universal Service Obligation Fund (USOF), while the remaining 3% is retained by the government. To date, around Rs 60,000 crore is lapsed in the USOF and hence the industry is demanding a reduction in the proportion that goes to this fund.
These reforms and reductions pave the way for an improvement in the health of the telecommunications sector. While the moratorium on dues would impact the government’s non-tax revenue from the telecom sector, two of the telecom operators prepaid their dues for earlier spectrum auctions totaling Rs 26,300 crore, making up for the loss for government for the current fiscal year. .
For the financial year 2022, the telecommunications sector is expected to contribute about Rs 54,000 crore to government non-tax revenue, which is in line with the budget estimate for the financial year. For the financial year 2023, ICRA estimates revenue at around Rs 30,000 crore, which will be the lowest in recent years.
High debt levels continue to remain the Achilles heel of the industry and are expected to increase to around Rs 4.7 lakh crore as of March 31, 2022, mainly due to the addition of spectrum liabilities arising from March auctions 2021. Thereafter, debt levels are expected to moderate to Rs. 4.5 lakh crore as of March 31, 2023.
5G would require a denser network of towers as well as healthy fiber penetration. As technology upgrading is imminent, the industry is shifting from a simple voice and data service provider to a more technology and content driven industry. Non-telecom companies, viz. enterprise, cloud services, digital services and fixed broadband services would play a crucial role in digital transformation, which will facilitate the growth of the sector in the future.
The author Sabyasachi Majumdar is Group Head and Senior Vice President and Ankit Jain is Assistant Vice President and Sector Head at ICRA Limited. The opinions expressed are personal.