ICRA Revises Telecom Industry Outlook from "Negative" to "Stable"

In a quarter-end update on the telecom industry, ICRA has updated the outlook from "Negative" to "Stable". After the long-anticipated tariff hikes went through, the telecom industry has finally seen positivity around it. ICRA also anticipated that by the end of FY23, the ARPU will improve to Rs. 170.

This will result in increased profit generation, which coupled with the relief package announced by the GoI, provides enough headroom for the industry to undertake deleveraging as well as funding Capex for the technology upgrade to 5G. With these tailwinds, ICRA has revised its outlook on the telecom services industry to Stable from Negative.

Telecom Industry on the Path to Recovery

Sabyasachi Majumdar, Senior VP and Group Head, Corporate Ratings, ICRA Limited, said, "the latest round of tariff hikes wherein the telcos increased the prepaid tariffs by around 20% will provide much-needed traction in the ARPU levels".

Majumdar added that the hikes, along with subscribers moving to 4G from 2G, will improve ARPU to around Rs. 170 by the end of FY2023. He added that with increased usage, industry revenue will go up by as much as 20% in FY23. Also, in FY24, the growth will still remain in double digits. Majumdar said that this will result in a healthy expansion in operating profits. What's more, it will grow by around 30% in FY2023. He further added that all of those factors will translate into a ROCE of around 10% for FY2023.

ICRA stated that the improvement started from the point when the government announced a telecom relief package. Soon thereafter, the telcos followed up with 4G tariff hikes in the prepaid segment. The rating firm also stated that the moratoria offered under the relief package will give the telecom industry an annual cash flow relief of around Rs. 40,000 crore for the industry till FY2025.

Moreover, the bank guarantee requirement for the telcos has also been slashed and the DoT has started returning the BGs to the telcos, which improves the financial flexibility of the sector. While the moratorium on the dues would impact the non-tax receipts of the government from the telecom sector, two telcos have pre-paid their dues towards earlier spectrum auctions totaling Rs. 26,300 crore thereby making up for the loss to the government. For FY22, the telecom sector is expected to contribute to around Rs. 54,000 crore to GoI’s non-tax receipts which will be close to the budgeted estimate for the fiscal.

Debt Still An Issue for Telecom Industry

Debt continues to remain the Achilles’ heel of the industry. ICRA expects industry debt levels to remain at around Rs. 4.7 lakh crore as of March 31, 2022, before moderating to Rs. 4.5 lakh crore as of March 31, 2023. Telcos have been focusing on deleveraging and Bharti Airtel Limited recently concluded its rights issue of Rs. 21,000 crore and collected 25% as upfront payment, while Vodafone Idea is also scouting for a fundraiser.

Ankit Jain, AVP and Sector Head, ICRA Limited, said, "the debt levels have remained unyielding for quite some time now and with the expectation of improvement in the profit generation after the latest tariff hikes, ICRA expects the debt metrics to improve as reflected by debt/OPBDITA of 3.4 times and interest coverage of 3.5 times as on March 31, 2023.

The relief package provided the much-needed breather for the industry and the participants complemented the same with a tariff hike which coupled with equity raising plans would provide the ammunition required for the technology upgrade to 5G. 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".