Indian telecommunications companies (telcos) are expected to see their operating profits increase by 40% in the next fiscal year, which will give them some room to invest in the deployment of their 5G services. Operating profit is expected to reach Rs 1 trillion, from Rs 72,000 crore in the next fiscal year, thanks to higher tariffs, better ARPU and the government’s deferred payment option.
Recent 20-25% rate increases announced by telecom operators and ongoing customer upgrades driven by continued increase in data usage will improve Average Revenue Per User / Month (ARPU) by 20% at Rs 160-165 for the next fiscal year, against Rs 135. during the previous fiscal year. ARPU growth will lead to non-linear growth in profitability due to the industry’s high operating leverage.
In addition, the four-year moratorium on government contributions announced by the Union Cabinet in September 2021 could provide annual cash flow relief of Rs 32,000 crore to telecom operators who have chosen it.
Telecommunications is a capital intensive sector requiring continuous technological upgrading. The main players had invested Rs Rs 5 lakh crore in 4G services between fiscal years 2017 and 2021.
They will now have to invest more to deploy 5G services. Higher operating profits and reduced cash flow will enable telecom operators to invest in the deployment of 5G mobile services in the medium term.
Even a cautious bid at the 5G spectrum auction – likely the next fiscal year – would require an investment of at least Rs 70,000 crore, assuming telecom operators initially take a calibrated approach and buy 5G spectrum. only in subways and circles of category A, where data consumption is high.
In addition, moderate investments in networks will continue.
Debt in the telecommunications sector rose to Rs Rs 4 lakh crore as of March 31, 2021, from Rs Rs 3.3 lakh crore a year ago due to large unpaid adjusted gross dues. Debt is expected to increase to Rs Rs 4.6 lakh crore this fiscal year due to additional liabilities relating to spectrum purchased at the March 2021 auction. That said, the debt / Ebitda ratio is expected to remain broadly stable at 4.1 times . The ratio could improve to 3.8x the next fiscal year and even fall below 2.5x for the top two players, helped by the full-year benefits of tariff increases and equity infusion.
That said, any intense spectrum supply beyond Class A subways and circles, and more than expected investment in 5G fibration, could impact credit profiles.
Analysis based on the three largest telecommunications companies – Reliance Jio, Bharti Airtel and Vodafone Idea – which account for over 90% of industry revenue. The base scenario assumes the pursuit of all three players in business.