ICRA Upgrades Telecom Sector Outlook from “Negative to Stable”
It almost sounds like a major turnaround for the telecom sector in India with the latest thumbs-up given by rating agency ICRA. Over the last few years, the telecom sector has been hit by a wave of consolidation, a battle of attrition on prices and finally, the very expensive battle over AGR charges and spectrum usage charges.
The ICRA upgrade does not indicate that the challenges have ended, but at least hint at the situation turning around. The sector may still have problems in the form of high debt levels, as we shall see later, but the outlook looks a lot better than last year.
Why did ICRA upgrade telecom outlook from Negative to Stable?
ICRA has offered a number of reasons for this outlook upgrade and here is a look at some of the key drivers for this upgrade.
1) ARPUs are the big story that has led to this change in outlook. ICRA estimates that the average revenue per user (ARPU) for the telecom sector should improve to Rs.170 on an average, which is a comfortable position to be in. This is a far cry from unremunerative double-digit ARPUs that telecom companies saw last year.
2) There have been several reasons for this ARPU upgrade. Most telecom companies across the board have hiked pre-paid tariffs by 15-20% and there could more on the way. Also, tariffs are automatically going up as more and more existing users get upgraded from 2G to 4G with better access to telecom and data services.
3) The relief package announced by the government in the form off deferment of AGR payments and rationalization of spectrum usage charges (SUC) promises to reduce the burden on the telecom companies. This will leave the telecom companies with sufficient surplus to bankroll the capex needed to upgrade to the 5G technology.
4) Industry growth is likely to get to a different plane altogether. ICRA expects telecom revenues to grow by 18-20% in FY23 and at 10-12% in FY24. Due to the high operating leverage that telecom companies enjoy, the operating profits can be expected to grow at nearly 30% in FY23. This is likely to sustain interest in the sector.
What about debt levels and impact on government revenues?
These are two different things. Let us address the debt issue first. The total debt of the telecom sector stands at Rs.470,000 crore for FY22 and that would slightly taper to Rs.450,000 crore in FY23. However as cash flows improve, raising capital will become easy. We have already seen Bharti raise Rs.21,000 crore via rights issue, so things are under control and improving.
On the subject of government revenue impact, Bharti and Reliance have prepaid their SUC charges of Rs.26,300 crore making up for the moratorium revenue loss. Also, in FY22,the telecom sector will anyways contribute around Rs.54,000 crore to the exchequer, which is close to the budgeted targets. The only hope is that the sector does not get caught up in.
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