Ensuing tariff hikes to fuel revenue growth, better debt metrics for telcos in FY2022: ICRA

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December 21, 2020 5:12 PM

ICRA took note of steady restoration in the pricing power back to the telcos and said that the next round of tariff hikes is on the cards.

"This, coupled with the consistent increase in data usage and steady up-gradation of subscribers from 2G to 4G with the proliferation of cheaper smartphones, is expected to drive revenue growth going forward," ICRA said."This, coupled with the consistent increase in data usage and steady up-gradation of subscribers from 2G to 4G with the proliferation of cheaper smartphones, is expected to drive revenue growth going forward," ICRA said.

Telecom service providers could undertake the next round of tariff hikes over the next one or two quarters, which is expected to fuel revenue growth in fiscal 2022, ICRA said on Monday.

The industry topline is expected to grow by 11-13 per cent over the next two years, with operating margins improving to about 38 per cent for the financial year 2022 on the back of improved cash flows, moderate capex and limited borrowings, it said.

“Next round of tariff hikes are expected soon as the industry debt continues to remain elevated, likely to at Rs 4.7 lakh crore as on March 31, 2022,” ICRA said in a release.

Given the higher funding needs arising from sizeable payouts towards statutory liabilities, spectrum purchase, regular revenue share with the government and auction instalments (that start from FY2023), it is imperative for the players to embark on sustainable and sizeable expansion in the average revenue per user (ARPU).

“The ARPU expansion will result in revenue growth and given the high operating leverage, the margins are also expected to expand. These measures are expected to translate into improvement in the debt coverage metrics of the industry, even as the overall debt remains high,” ICRA said.

Anupama Arora, Vice President and Sector Head, Corporate Ratings, ICRA said tariff hikes and upgradation of subscribers from 2G to 4G is expected to result in improvement in ARPU to around Rs 220 in the medium term.

“ICRA expects the industry revenue to grow by 11-13 per cent over the next two years, with operating margins improving to around 38 per cent for financial year 2022,” Arora said.

Better cash flow generation, alongwith moderation in capex intensity, would limit the dependence on incremental external borrowings for operations. However, the addition of AGR (Adjusted Gross Revenue) liabilities to debt and the next round of spectrum auctions would act as a dampener.

“ICRA expects total industry debt to remain elevated at Rs 4.7 lakh crore as on March 31, 2022,” Arora pointed out.

ICRA took note of steady restoration in the pricing power back to the telcos and said that the next round of tariff hikes is on the cards.

A glimpse of the same was witnessed in Vodafone Idea Limited (VIL) increasing postpaid tariffs in select circles, just a few months after the introduction of new tariff plans by Reliance Jio.

India still has one of the lowest tariffs in the world, indicating enough headroom for an increase.

“This, coupled with the consistent increase in data usage and steady up-gradation of subscribers from 2G to 4G with the proliferation of cheaper smartphones, is expected to drive revenue growth going forward,” ICRA said.

In the first half of the current fiscal, the industry AGR witnessed a year-on-year growth of 25 per cent. This was driven by an increase in industry ARPU to more than Rs 90 for H1 financial year 2021, from Rs 74 for the year-ago period.

Debt, it said, continues to remain the achilles’ heel of the industry.

“Although sizeable deleveraging was done in FY2020, which along with moderation in capex intensity has resulted in a decline in debt to Rs 4.4 lakh crore as on March 31, 2020; and though improvement in cash flow generation is anticipated, the debt levels are expected to increase further to Rs 4.7 lakh crore as on March 31, 2022,” it said.

This is due to accumulation of AGR liabilities in debt, in addition to the proposed spectrum auctions.

Ankit Jain, Assistant Vice President, ICRA said the sector is moving towards an inflection point, where the next phase of growth will be driven by the non-telco businesses, which includes enterprise business, cloud services, digital services and fixed broadband services.

“Further, in terms of the core business, 5G, which is knocking on our doors, would be the growth driver. It has already been launched in some countries,” Jain observed.

Given the high spectrum prices, the nascent stage of the ecosystem, the relatively low penetration of 4G services and limited paying capacity of the Indian consumer, coupled with the precarious position of telcos’ balance sheets is likely to play a spoilsport in the technology up-gradation to 5G, Jain added.

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