Telcos need to boost their average revenue per user (ARPU) by at least 25 per cent in the next year to be sustainable, which would result in another round of tariff hikes, domestic rating agency Crisil said on Wednesday.
It said the returns on capital employed are abysmally low for telcos at present and also considering the Supreme Court ruling on Adjusted Gross Revenue (AGR), which has created huge liabilities.
Apart from the tariff hikes, which were last done in December 2019, the telcos will need to up the number of users opting for the more expensive 4G offerings and also bundle plans with content, it said, adding that the industry can invest in 5G only through ARPU growth.
Intense competition over the past three years, heavy capital expenditure (capex) to roll out 4G networks, and pending AGR liabilities have weakened their balance sheets, the rating agency said in a note.
At present, return on capital employed (RoCE) needs to move up to 10 per cent level from the 3 per cent level in FY20, it said, adding that had it not been for the SC's AGR ruling, the RoCE would have increased to 7 per cent by end of financial year 2021 and moved up further to 9 per cent by financial year 2022.
Telcos have a compelling reason to push ARPU up 25 per cent over the next 6-12 months to achieve a sustainable RoCE of 10 per cent, given their abysmally low returns at present and the increased liability on account of AGR dues, the rating agency warned.
The Rs 1.15 lakh crore to be paid in AGR dues will erode all the benefits of December's tariff hikes and take the RoCE down to 4-5 per cent levels, it said.
Our base case assumes monthly ARPU reaching Rs 175-180 by next fiscal from Rs 140 in the first half of the current fiscal so as to generate a sustainable RoCE of 10 per cent, its senior director Sachin Gupta said.
Such a scenario will push the industry revenue by a third to Rs 2 lakh crore in fiscal 2021 as compared to financial year 2020's Rs 1.5 lakh crore despite muted subscriber growth, it said.
The pandemic will also help the ARPU through increasing data consumption due to proliferation of work from home, video conferencing and other forms of online business communications, along with a big uptick in over-the-top streaming services, it said.
It estimated data usage per subscriber per month is expected to grow 28-30 per cent to 15 gigabyte by the end of this fiscal.
A Re 1 increase in ARPU adds about Rs 1,000 crore to the industry's earnings before interest, tax, depreciation and amortisation (EBITDA), indicating high operating leverage, it said.
Improvement in profitability, coupled with a sizable equity infusion of about Rs 1.7 lakh crore in fiscal 2020 had helped reduce the debt level to Rs 2.8 lakh crore as on March 31, 2020, from Rs 3.4 lakh crore a year ago.
despite getting relief in AGR payment terms, at this juncture, sponsor support, sizable tariff hikes, and prudent capex would remain crucial to support the credit profile of telcos, its director Nitesh Jain said.
Capital expenditure is expected to moderate to Rs 62,000-65,000 crore per annum over fiscal 2021 and 2022, compared with Rs 83,000 crore in fiscal 2020, due to frontloading of network capex by telcos in the past four years for 4G rollout, it said.
The telcos are unlikely to incur any major investments for the 5G services at least for a year, it added.
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