India’s telecommunications companies (telcos) could crank up operating profit (or Ebitda) 15-17% to ~Rs 1.2 lakh crore this fiscal from ~Rs 1.04 lakh crore last fiscal, on demand for bigger data packs amid surging consumption.

That will help sustain the strong credit risk profiles of telcos rated by CRISIL Ratings, despite an expected increase in capital expenditure this fiscal for expansion of 5G services.

The sector has high operating leverage as about three-fourths of the total cost is fixed and any rise in average revenue per user (ARPU) flows directly to operating profit. Between fiscals 2020 and 2023, operating profit almost doubled, while ARPU rose 1.4 times.

Says Manish Gupta, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, “The ARPU is expected to grow 8-10% on-year to ~Rs 190 this fiscal despite no broad-based tariff hike likely in the near term as telcos focus on migrating 4G subscribers to 5G services. Growth would be driven by rise in data usage to 23-25 GB per subscriber/month this fiscal from ~20 GB last fiscal, and recalibration of tariff plans, leading to higher operating profitability. At the sector level, operating profit should rise ~15-17% to ~Rs 1.2 lakh crore, despite limited monetisation of 5G services.”

Monetisation of 5G services is likely to be gradual as it hinges on evolving use cases and increase in the penetration of 5G handsets in India, which is currently low. Consequently, 4G technology will remain dominant for a while.

Telcos may spend ~Rs 90,000 crore this fiscal to beef up network infrastructure, compared with ~Rs 80,000 crore last fiscal, given the surge in demand for data, and to improve services and customer experience.

Increased data consumption also requires higher spectrum. All private telcos are believed to be adequately placed, having purchased spectrum worth ~Rs 1.5 lakh crore at the previous auction. Hence, the outgo for spectrum purchase at the next auction is expected to be lower than the previous one.

Says Naveen Vaidyanathan, Director, CRISIL Ratings, “Large spectrum investments last fiscal resulted in the debt of telcos (including lease liabilities) rising to ~Rs 6.3 lakh crore as of March 31, 2023, from Rs 4.6 lakh crore as on March 31, 2022. Investments for 5G services could result in that number rising to ~Rs 6.5 lakh crore by the end of this fiscal. Yet, the leverage of telcos rated by CRISIL Ratings should improve because of better profitability. Their ratio of debt to Ebitda is foreseen at ~3.0 times this fiscal, compared with ~3.3 times last fiscal.”

Larger than expected investments in 5G networks and spectrum will have a bearing on credit metrics and will be monitorable.

Ebitda: Earnings before interest, tax, depreciation and amortisation
Notes: Our analysis is based on the top three telecom companies: Bharti Airtel, Reliance Jio, and Vodafone Idea, which account for over 90% of the industry’s revenue. Adjusted gross revenue (AGR) liabilities are considered part of debt for calculating the debt-to-Ebitda ratio.