The telecom sector is highly capital intensive as it requires an extensive network infrastructure to provide fixed line and wireless services.
The capex intensity of the telecom sector is expected to decline by around 30-35% in FY 2020 to around Rs 65,000 crore as the industry has achieved a sizeable penetration of 4G and peak cycle of capex is over, ratings agency Icra has said.
The capex intensity is expected to witness moderation till the time there is a technology upgrade to 5G.
The telecom industry had incurred a capex of more than Rs 1 lakh crore in FY 2019. The capex levels remained high in the past few years as telecom operators were expanding their 4G outreach. The capex intensity, as measured by the capex/sales ratio has been significantly higher over 50% compared to international standards of 17-18%, especially in the last few years, Icra said.
“The average capex intensity for Indian telcos has been amongst the highest over the 2017-2019 period. Over the last 5 years, the telcos were focusing on expanding their 4G networks and total capex by the top telcos, including spectrum purchases was around Rs 5 lakh crore,” Ankit Jain, assistant vice president, corporate ratings, Icra said. The ratings agency said such a high capex, especially in light of the headwinds faced by the industry in terms of pressure on revenue and profit generation and high debt levels, led to pressure on company balance sheets.
Icra further said the organic cash generation of the industry has remained insufficient to cover the debt repayment obligations and capex needs, resulting in additional funding requirements and thus debt levels witnessed further increase in FY2019 to around Rs 5 lakh crore. However, FY 2020 has witnessed some degree of deleveraging and with some of the plans on the anvil for debt reduction and the debt is expected to reduce to around Rs 4.25 lakh crore as of March 2020.
The telecom sector is highly capital intensive as it requires an extensive network infrastructure to provide fixed line and wireless services. While the capex cycle for fixed line services is front loaded, it is ongoing for wireless services. The last few years have witnessed an explosion of mobile data consumption, which along with substantial increase in total wireless internet subscribers, has mandated the telcos to consistently invest heavily in their networks.