Telecom capex intensity to see moderation till 5G comes in: ICRA

After scaling a high propelled by 4G network expansion, the capex intensity of the telecom industry is expected to witness moderation till the point there is technology upgrade to 5G, which is still some time away, ICRA said on Thursday.

The capex intensity -- measured by the capital expenditure (capex)-to-sales ratio -- has been significantly higher at over 50 per cent compared to global standards of 17-18 per cent, especially in the past few years, it said.

The capex levels are expected to witness moderation to around Rs 65,000 crore for 2019-20, ICRA added.

"With the telecom industry achieving a sizeable penetration for 4G, the peak capex cycle for Indian telcos (telecom companies) is over," it said in a note.

From here on, the capex intensity is expected to witness moderation till the time there is a technology upgrade to 5G.

"Capex levels remained high in the past as the telcos were expanding their 4G outreach," ICRA said.

Ankit Jain, assistant vice-president (corporate ratings) at ICRA, said the capital expenditure incurred by the telecom operators for expansion and upgradation of network has remained high on account of increasing data requirements, changes in technology and spectrum acquisition.

"Spectrum acquisition accounts for a majority of capex and thus debt for the industry. During FY2019, the industry incurred a capex of more than Rs 1 lakh crore," Jain added.

Such a high capex, he said, especially in light of the headwinds faced by the industry in terms of pressure on revenue and profits and high leverage, led to pressure on companies' balance sheets.

The previous few years have witnessed an explosion of mobile data consumption, which along with substantial increase in total wireless internet subscribers, has prompted telcos to consistently invest heavily in their networks, it said.

"Now, with 4G capex summiting and 5G still some time away, the capex levels are expected to witness temperance to around Rs 65,000 crore for FY2020, which coupled with steady improvement in sales post the uptick in average revenue per user (ARPU) levels would result in decline in capex intensity to around 30-35 per cent, although it will still remain higher than the international peers," Jain added.