Indian telcos may hike tariffs in next 1-2 quarters; industry ARPU likely at Rs. 220: Analysts

ICRA said on Monday that Indian telecom service providers (telcos) to step in the next round of tariff hikes over the next one or two quarters, which is expected to drive revenue growth in FY22.

Ms. Anupama Arora, Vice President and Sector Head, Corporate Ratings, ICRA Ltd, said that in the medium term, tariff increases and subscriber upgrades from 2G to 4G are likely to result in ARPU improvements to about Rs. 220 (US$ 2.99).

In consideration of the increased funding requirements resulting from significant pay-outs for AGR liabilities, spectrum purchases, daily government revenue shares and auction instalments (starting in FY2023), it is important for telecoms to proceed on a sustainable and substantial increase in average revenue per user (ARPU).

The development of the ARPU would lead to sales growth and margins are also expected to increase given the high operating leverage. It is anticipated that these steps will lead to changes in the industry's debt coverage measures, even though total debt remains high.

Over the next two years, ICRA expects industry profits to increase by 11-13%, with operating margins expanding to around 38% for FY2022. Improvement in the development of cash flow, combined with moderation in the intensity of capex, will reduce reliance on incremental external operating borrowings.

The addition of AGR debt obligations and another round of spectrum auctions will, however, serve as a dampener.

At Rs. 4.7 lakh crore (US$ 64 billion), ICRA expects overall industry debt to remain elevated.

ICRA states that the pricing control back to the telcos is slowly restored and the next round of higher tariffs is on the cards.

Just a few months after the launch of new tariff plans by Reliance Jio Infocomm Limited (RJIL), Vodafone Idea Limited (VIL) experienced an increase in post-paid tariffs in select channels.

India still has one of the lowest tariffs globally suggesting adequate space for the same to grow. This, together with the steady rise in data consumption and the continued upgrade of subscribers from 2G to 4G with the proliferation of affordable smartphones, is expected to push revenue growth in the future.

The AGR industry experienced a 25% year-on-year increase in the first half of FY21 . This was prompted by an improvement to more than Rs. 90 (US$ 1.22) for the first half of FY21, from Rs. 74 (US$ 1.01) for the first half of FY20, in industry ARPU (as stated by TRAI). Debt continues to be an industry's Achilles heel. While substantial deleveraging was carried out in FY2020, which has resulted in a decrease in debt to Rs. 4.4 lakh crore (US$ 60 billion) as of March 31, 2020 along with moderation in capex intensity; and improvement in cash flow generation is anticipated.

This is because of the development, in addition to the planned spectrum auctions, of AGR liabilities in debt. In addition, the increase in operating metrics is likely to result in an extension of the measures for debt coverage. Interest coverage is expected to increase from 1.8x for FY2020 to 2.5x for FY22 and overall debt/OPBDITA is expected to decrease over the same duration to 4.6x from 6.7x.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.