Why has ICRA upgraded the Indian telecom sector and what it means for Bharti, Reliance Jio and Vodafone Idea?

In its latest upgrade, ICRA has raised the outlook for the telecom sector in India from Negative to Stable, which is a big shift to the beleaguered sector. In the last few years, telecom was hit by a wave of consolidation, price wars and the huge cost on account of the AGR charges apart from the ongoing legal battle. As ICRA put it, the worst now seems to be behind the telecom sector. Here is why ICRA has upgraded the telecom sector.

The average revenue per user or the ARPUs have been improving sharply and promise to improve still further. ICRA estimates ARPU for the telecom sector as a whole to improve to Rs.170 on an average, which is a big growth from the sub-90 levels of ARPU that were visible occasionally in the last 2 years. This ARPU upgrade has been achieved by higher pre-paid tariffs and shifting scores of customers from 2G to 4G networks.

Secondly, the government announced a generous relief package, which has given a lot of breathing room for the telecom companies, including the beleaguered Vodafone Idea. The government has already offered deferment of AGR payments as well as rationalization of spectrum usage charges (SUC). All this is likely to reduce the stress and even the loss of revenues for the government is being largely compensated by prepayment of SUC.

With greater resources at its disposal, the telecom companies will have sufficient surplus to bankroll the capex needed to upgrade to the 5G technology. This is likely to help grow the revenues by 18-20% in FY23 and at a healthy rate of 10-12% in FY24. Most of the telecom companies enjoy a rather high operating leverage. That means this sales growth would also translate into an average 30% growth in operating profits in FY23.

There is the irritant of debt levels, which is likely to be elevated even at Rs.470,000 crore at the end of FY22 and at Rs.450,000 crore towards the end of FY23. However ICRA has expressed confidence that as cash flows improve, raising capital will become easy. One example is the way Bharti has raised Rs.21,000 crore via rights issue. That should improve things a lot more for telecom plays.