Recovery sustains in telcos' operating metrics; debt a big impediment: ICRA

ICRA on Monday said it expects steady recovery in telecom sector to sustain by way of ARPU expansion which is likely to boost revenues and margins for the industry.

That said, debt continues to remain the achilles heel of the industry, it cautioned.

ICRA expects total industry debt to remain elevated at Rs 5 lakh crore as on March 31, 2022.

The next round of tariff hikes can provide a fillip to the industry Average Revenue Per User (ARPU). The expansion in profitability is expected to result in improvement in the debt coverage metrics of the industry, but it would continue to remain weak given the high debt levels, ICRA observed.

 

Elevated debt levels will continue to remain the "major impediment" as industry added Adjusted Gross Revenue (AGR) levies related debt and spectrum debt after recently-concluded auctions.

According to Sabyasachi Majumdar, Senior Vice President and Group Head, Corporate Ratings, ICRA, "Consistent upgradation of subscribers from 2G to 4G and rise in usage of telephony services is expected to result in improvement in ARPU to around Rs 220 in the medium term."

Industry revenues are expected to grow by 11-13 per cent per annum over the next two years, which given the high operating leverage is likely to result in expansion in operating margins, Majumdar added.

"The addition of AGR liabilities to debt and participation in the latest round of spectrum auctions could act as a dampener to the positive impact of improvement in cash flow generation, to the industry debt levels," Majumdar noted.

The recently-concluded spectrum auction results exceeded ICRA's earlier estimates and fetched around Rs 77,800 crore of which around Rs 22,000 crore was paid upfront in March 2021 itself.

Reliance Jio (RJIL) was the most aggressive bidder, acquiring spectrum worth Rs 57,123 crore, followed by Bharti Airtel (BAL) at Rs 18,699 crore and Vodafone Idea (VIL) at around Rs 1,993 crore. While there was no interest in the 700 MHz band yet again which remained unsold, 2100 MHz and 2500 MHz bands witnessed muted participation.

In all, telcos not only bid for renewals of the expiring spectrum but focused on consolidating their spectrum holdings, primarily in the 800 MHz, 1800 MHz and 2300 MHz bands.

"While the sub-GHz bands will be crucial for 5G technology deployment going forward as well as improvement of indoor coverage, the appetite for 2300 MHz band emanates from the rising mobile broadband usage. Moreover, recently RJIL entered into a spectrum trading arrangement with BAL to acquire more spectrum in the 800 MHz band," it said.

While the value of total spectrum sold was just 19 per cent of the total value of radiowaves on offer, this would result in addition in the total debt of the industry.

"Debt continues to remain the achilles' heel of the industry. With debt levels unyielding at around Rs 5 lakh crore expected for March 31, 2022, the debt coverage indicators continue to remain weak for the industry, despite the expected improvement in cash flow generation," ICRA said.

Interest coverage is expected to improve and total debt/OPBDITA is expected to decline; still notwithstanding the improvement, the indicators continue to remain weak due to the elevated debt levels.

"While there has been an improvement in the operating metrics of the industry, 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. The growth in these segments is expected to be strong, albeit at a lower base," Majumdar said.

In terms of core business, 5G will be the next transformation, although its adaptation would be contingent on the high spectrum prices, the nascent stage of the ecosystem, the current under-penetration of 4G services and limited paying capacity of the Indian consumer, coupled with the precarious position of the balance sheets of telcos.