ICRA has maintained a negative outlook for the Indian telecom industry, which is grappling with AGR dues, notwithstanding the green-shoots of recovery. The telecom industry woes according to ICRA continue as the industry is required to pay a substantial amount to the Department of Telecom in the form of retrospective AGR related dues. These amounts, as per the Supreme Court order dated October 24, 2019, are sizeable (including the interest and penalties) and in the event of an outflow towards these payments, it will create additional pressure on the balance sheet of the telecom operators, depending on the funding mix. This comes at a time when the industry’s health was on the recovery track, on the back of deleveraging initiatives, moderation in capex intensity and restoration of pricing power.
The sector has passed through a phase of turbulence during the last few years, with intense competition and pricing pressures leading to a decline in revenues and profitability. Consistent downward revision in prices resulted in one of the steepest falls in the industry average revenue per user (ARPU) levels with the estimated blended ARPU falling from Rs. 169 in Q1 FY2017 to Rs. 124 in Q1 FY2020; the industry adjusted gross revenue (AGR) fell from Rs. 44,570 crore to Rs. 28,650 crore in the same period. The overall high operating leverage of the industry meant that the decline in revenues percolated to pressure on profitability and cash flows.
Further, the industry is saddled with elevated debt levels and consistently high capital expenditure (capex) requirements. The debt has consistently remained high owing to reduction in organic cash flow generation and consistently high capex requirements. As per ICRA estimates, the debt as on March 31, 2019 stood at Rs. 5.0 lakh crore. The private telecom operators undertook deleveraging measures during FY2020, which included rights issue by Bharti Airtel and Vodafone Idea, IPO of the African operations by Airtel and hiving off of the tower and fibre assets by RJio. While these have been concluded, other plans like further equity infusion by Airtel, monetisation of stake in tower companies and fibre assets are on the anvil for some operators. These are expected to result in decline in debt as on March 31, 2020 to around Rs. 4.4 lakh crore (without taking any incremental debt due to AGR issue).
This financial year also witnessed steady improvement in ARPU levels driven by weaning of low ARPU subscribers with the introduction of minimum recharge plans. Further, the telecom operators announced a steep tariff hike, first of its kind in a long time, to the tune of 35-40%, which will manifest into improvement in ARPU levels and healthy improvement in organic cash flow generation. Since the subscriber base has largely saturated, the key drivers for growth in the telecom sector would be: a) pricing improvement, and b) identifying and implementing new use cases for the telecom services. The latter is a longer-term goal and would require more investments and thus, in the immediate term, it is the push for higher realisation which is achievable and has been attempted.