An estimated ~20% improvement 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 Ebitda¹, of the Indian telecom sector by ~40% over fiscal 2021 to ~Rs 1 lakh crore in fiscal 2023 (see chart 1 in annexure).

Improving profits along with moratorium on government dues² would provide telecom companies (telcos) room to invest an estimated Rs 1.5-1.8 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.

Says Nitesh Jain, Director, CRISIL Ratings, “Recent tariff hikes and ongoing customer upgrades could push the sector’s ARPU by ~20% to Rs 160-165 next fiscal from ~Rs 135 in the last fiscal. ARPU growth will lead to non-linear growth in profitability due to the high operating leverage of the telecom sector. The sector’s Ebitda is seen surging ~40% to ~Rs 1 lakh crore next fiscal from Rs 72,000 crore in fiscal 2021. Yet RoCE will be moderate at 7-8% because of high capital intensity and adjusted gross revenue dues.”

The sector’s high capital intensity is because telcos need to continuously invest in technological upgradation and spectrum purchase. After having invested ~Rs 5 lakh crore over fiscals 2017-2021 to roll out 4G services, they will now need to invest towards 5G rollout before reaping returns. We foresee investments of at least ~Rs 70,000 crore³ at the 5G spectrum auctions likely next fiscal — if the bidding is prudent.

But the four-year moratorium on government dues announced by the Union Cabinet recently could provide annual cash-flow relief of ~Rs 32,000 crore over the next four years to telcos that have opted for it, though it will continue to be considered as debt. The sector’s debt is estimated to rise to ~Rs 4.6 lakh crore this fiscal because of additional liabilities pertaining to spectrum purchased at the recent auction.

Says Rakshit Kachhal, Associate Director, CRISIL Ratings, “The sector’s financial leverage, as indicated by debt-to-Ebitda, is expected to stay elevated at over 4 times this fiscal. Next fiscal, it could improve to ~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” (See chart 2 in annexure).

That said, any intense bidding for spectrum beyond the metros and category A circles, and higher-than-expected investment in fiberisation for 5G, could have a bearing on credit profiles.

Our 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. Our base case assumes continuation of these three players in business.
1 Earnings before interest, tax, depreciation, and amortization
2 Includes AGR and spectrum dues, except for spectrum purchased during auction held in March 2021
3 Estimated as per current reserve prices recommended by TRAI for 5G spectrum bands, assuming the top two telcos would buy out the entire 100 MHz spectrum in each of the metros and category A circles, given data consumption is higher in these circles