Telecom companies have a compelling reason to push average revenue per user (ARPU) up by about 25 per cent over the next 6-12 months to achieve a sustainable return on capital employed (RoCE), according to a report by Crisil.
This is due to the operators’ abysmally low returns at present and increased liability on account of Adjusted Gross Revenue (AGR) dues.
Though operators did go for a significant tariff hike in December 2019, intense competition over the past three years, heavy capital expenditure (capex) to roll out 4G networks and pending AGR liabilities have weakened their balance sheets. Therefore, an increase in ARPU will be essential to strengthen credit profiles, it said.
AGR liability
Tariff hikes, rising 4G adoption and increasing data consumption by adopting content-led bundled pricing strategies could help boost ARPU growth. That could, in turn, beam up profitability, which will also help telcos invest in 5G networks over the medium term.
Had the AGR liability not panned out as it did, the tariff hikes undertaken in December 2019 could have improved the industry’s RoCE to about 7 per cent in fiscal 2021 and to 9 per cent in fiscal 2022, from lows of 3 per cent in fiscal 2020.
Now, with the Supreme Court’s final judgement on the AGR case in place, telcos have to bear AGR liabilities of ₹1.15-lakh crore, which is expected to erode the benefits of the tariff hikes implemented last fiscal and bring the RoCE back to 4-5 per cent this fiscal.
“Our base case assumes monthly ARPU reaching ₹175-180 by next fiscal from ₹140 in the first half of the current fiscal so as to generate a sustainable RoCE of about 10 per cent. Of course, this will depend on competitive intensity, but it can crank up industry revenue to over ₹2-lakh crore next fiscal, or a third more than the ₹1.5-lakh crore seen in fiscal 2020, despite muted subscriber growth,” Sachin Gupta, Senior Director at CRISIL Ratings, said.
Benefiting from WFH
Apart from tariff hikes, the ARPU will also benefit from the increasing data consumption due to proliferation of work from home, video conferencing and other forms of online business communications, along with a big uptick in over-the-top streaming services amid the pandemic. Consequently, data usage per subscriber per month is expected to grow 28-30 per cent to about 15 gigabyte by the end of this fiscal.
Sustenance of these drivers over the medium term will, however, need to be monitored, it added.
ARPU growth will lead to non-linear growth in profitability due to the high operating leverage of the telecom business.
Improvement in profitability, coupled with sizeable equity infusion of about ₹1.7-lakh crore in fiscal 2020 had helped reduce the debt level to ₹2.8-lakh crore as on March 31, 2020, from ₹3.4-lakh crore a year ago. Debt protection metrics, though weak, improved with debt-to-Ebitda ratio at 4.7 times in fiscal 2020 compared with 7.3 times in fiscal 2019.