The steep tariff hikes of up to 50% being implemented by telecommunication companies1 (telcos) have the potential to double the industry’s EBITDA2 next fiscal. This is a structural positive for an industry weighed down by weak cash flows and mounting debt.
CRISIL expects the leverage ratio (debt/EBITDA) of the industry to improve to 4.6 times next fiscal from 7.5 times in fiscal 2019 – if the EBITDA improves as expected – and after factoring in licence fee payouts following a recent Supreme Court order.
Further, as operating cash flows improve, telcos will be in a better position to arrange funding for adjusted gross revenue (AGR)-related payouts that they have to make.
CRISIL’s analysis shows the revised tariffs will improve the industry’s average revenue per user (ARPU) by about 25% to Rs 145 next fiscal from around Rs 116 in fiscal 2019.
And given the high operating leverage of the telecom business, nearly 80% of this incremental revenue will flow straight to EBITDA. Our analysis shows every Re 1 increase in ARPU adds about Rs 1,000 crore to the industry’s EBITDA. With 25% growth in blended ARPU expected, EBITDA could double in fiscal 2021 to about Rs 60,570 crore from Rs 29,450 crore last fiscal (see Annexure 1 for the calculation).
We believe the latest tariff hikes would accelerate SIM consolidation and curb subscriber additions and hence our calculation factors in no growth in subscriber base.
Says Sachin Gupta, Senior Director, CRISIL Ratings, “The crucial part now is pricing discipline and extent of down-trading from current plans to cheaper ones by subscribers. That will determine the kind of net gains that telcos will make in the near-term.”
Additionally, the final outcome of the AGR issue (for which review petitions are filed in the Supreme Court) will have an impact on the already stretched debt profiles of telcos. The top 3 operators had Rs 3.3 lakh crore of debt as on September 30, 2019.
Says Nitesh Jain, Director, CRISIL Ratings, “Our base-case assumes a payout of Rs 50,000 crore in licence-fee arrears by these players. Any additional liability will stretch their balance sheets and necessitate fresh equity infusion and support from sponsors to maintain credit profiles.”
We have not factored in any outgo towards purchase of 5G spectrum at the auctions expected in the near-term, and any significant payout will require a change in our thesis.
The tariff hikes are a good opportunity for the industry to repair its financials and become sustainable.
1 Our EBITDA impact analysis is based on Bharti Airtel-India mobility business, Vodafone Idea and Reliance Jio. Whereas Debt/EBITDA is based on Bharti Airtel-consolidated, Vodafone Idea and Reliance Jio.
2 Earnings before interest, tax, depreciation and amortization