CHENNAI: India’s telecom sector seems to have shrugged off the short-term impact of the AGR liabilities crisis and last year’s tariff hikes have led to a steady improvement in profitability metrics.
However, analysts note that the sector remains at risk from high levels of debt.
According to research agency ICRA, the telecom sector is expected to record steady recovery with a sustained momentum in terms of average revenue per user (ARPU) going forward—boosting margins and profits.
But, “debt continues to remain the achilles’ heel of the industry” the agency noted, “With debt levels unyielding at around Rs 5 lakh crore expected for March 31, 2022, the debt coverage indicators continue to remain weak for the industry, despite the expected improvement in cash flow generation”.
The agency believes such an elevated debt level, which is large enough that the improvement in margins is unlikely to have much impact, will continue to remain the “major impediment” for the sector.
Apart from debt, the sector has seen substantial improvement in several key metrics arising from the last round of tariff hikes.
“Consistent upgradation of subscribers from 2G to 4G and rise in usage of telephony services is expected to result in improvement in ARPU to around Rs 220 in the medium term," says Sabyasachi Majumdar, Senior Vice President and Group Head, Corporate Ratings, ICRA.
Going forward, industry revenues are expected to grow by 11-13 per cent per annum over the next two years, which given the high operating leverage is likely to result in expansion in operating margins, he added.
However, the addition of AGR liabilities to debt and participation in the latest round of spectrum auctions could “act as a dampener to the positive impact of improvement in cash flow generation”, the agency says.
While interest coverage is expected to improve and debt-to-operational profit ratios expected to decline, indicators continue to remain weak due to the elevated debt levels.
The recently concluded spectrum auctions also add to the cash outgo for telecom companies.
While telcos bid for Rs 77,800 crore worth spectrum, they have paid Rs 22,000 crore was paid upfront by the end of March 2021.
Spectrum sale
Reliance Jio won bids worth Rs 57,123 crore, followed by Bharti Airtel at Rs 18,699 crore and Vodafone Idea at around Rs 1,993 crore.
Industry debt
While the value of total spectrum sold was just 19 per cent of the value of resources on offer, ICRA notes that this would still add to debt.