As budget expectations were doing the rounds in January, telecom companies charted a wish list from the Centre to fuel growth. It included a reduction in levies to ease their financial burden. However, the Centre was not keen to play the role of the wish-granting genie. The Budget plans an increase in spending on telecom infrastructure to Rs 10,400 crore in FY24 from Rs 3,010 crore in FY23. But it has also increased its total non-tax revenue collection target by 30% to Rs 89,469 crore. The industry traded in the red on February 01, 2023.

Telecom companies are obligated to pay the usage and license fee charged by DoT (Department of Telecom), which is roughly 8-10% of their annual revenue. To ease the payments, the Centre offered telecom companies a four-year period to pay off their AGR (adjusted gross revenue) dues in 2021. However, the businesses felt that redefining what constituted the AGR would ease the burden even more. In June 2022, the Centre scrapped the spectrum usage charge (SUC), bringing relief to the sector. SUC is a percentage of license fees paid on the AGR, in the range of 3-5%, computed by the DoT.

Telecom companies also wanted fiscal incentives to drive manufacturing and development projects. With the new 5G rollouts, the companies would need support from the Centre in the form of PLI schemes to boost infrastructure growth.

Overall, analysts from Motilal Oswal, Dolat Capital and ICICI Securities expect Bharti Airtel and Reliance Jio (the two biggest fish) to be in a sweet spot with better financials in FY23 and FY24.

Subscriber base to fall in Q3FY23, average revenue per user (ARPU) inches up

Subscriber growth has largely remained flat for Bharti Airtel, while it fell marginally for Reliance Jio, according to data released by the Telecom Regulatory Authority of India (TRAI). Meanwhile, Vodafone Idea’s total subscriber base fell by 1% MoM in November 2022. Vodafone Idea has been seeing a continuous decline in its subscriber base since April 2022.

According to ICICI Securities, Vodafone Idea’s subscribers are likely to shrink in Q3FY23. Even though Airtel maintained resilience in increasing its total subscriber base till November 2022, all three companies reported a fall in active subscribers as a percentage of total subscribers.

Analysts expected Airtel’s ARPU to increase to Rs 196.4 while it reported an ARPU of Rs 193 in Q3, close to analysts' estimates. Meanwhile, Reliance Jio has reported a marginal QoQ rise in ARPU in Q3FY23.

The growth of ARPU is a sign of higher-value plans gaining traction. However, subscriber addition is cooling off because of a reduction in premiumisation and a lack of major tariff hikes.

Revenue likely to moderate on low tariff hikes; 5G rollouts to increase cost

The industry’s subscriber growth is flat and this has moderated earnings for telecom companies. Airtel’s revenue, however, grew better than estimates with a 3.7% QoQ rise to Rs 35,804.4 crore. Prabhudas Lilladher expected 4.4% QoQ revenue growth for Reliance Jio in Q3FY23, but it clocked only 2.1% (Rs 22,998 crore).

Tariff hikes are needed not only to improve revenue, but to also offset increasing costs. For Reliance Jio, tariff hikes would improve cash flows and operating profit. Analysts expect tariff hikes to come up by mid-2023 because of growth in data capacity utilization.

The moderate increase in net revenue can also be because of the scrapping of SUC charges, which leaves funds in the hands of companies, which can be utilised for better purposes. On average, Airtel and Jio save close to Rs 450 crore, while Vodafone might save up to Rs 200 crore in SUC charges.

This will aid revenue growth and EBITDA margin expansion. Bharti Airtel’s EBITDA margin has expanded 70 bps QoQ to 52% in Q3, and 120 bps QoQ to 52.2% for Reliance Jio.

AGR likely to fall as DoT redefines its meaning

Telecom companies’ disagreement with the DoT on the definition of AGR went through a lot of twists and turns until last year. The argument of including non-telecom revenue had led to a spike in AGR paid by telecom companies. A high AGR means a higher license fee. According to a report, operators used to pay 8% of AGR as license fees.

However, in June 2022, DoT scrapped SUC charges (3% of AGR) and now it plans to cut out landline services revenue. In October 2022, DoT introduced a new concept of applicable gross revenue (ApGR) where all non-telecom revenue is excluded from gross revenue.

This would mean that telecom companies can now reduce their payments towards pending dues. However, with 5G rollouts, costs are likely to offset the lower license fees.

According to TRAI data, Bharti Airtel, Reliance Jio and Vodafone Idea’s AGRs have been on the rise till Q1FY23 but they are expected to dip as Q2 and Q3 data is awaited.

Vodafone Idea faces capital issues, payment delays

Vodafone is dealing with the urgency of raising capital. The company opted for the conversion of Rs 16,000 crore of interest liability payable to the government into equity. But the process was delayed as the Centre wanted promoters to pump in more money. Reports suggest that they want Vodafone’s stock price to stabilize at Rs 10 before carrying out the transaction.

However, the wait is finally over and Vodafone’s board has allotted a 33.4% stake to the Centre in lieu of conversion of interest dues from the deferment of AGR and spectrum auction payments. The Centre has cleared the conversion of Rs 16,133 crore of interest dues.

Capital infusion has become important for Vodafone to avoid payment delays. Indus Towers already gave out a warning letter to Vodafone in September 2022 asking the company to start paying dues in total from January 2023 or it will cut tower access for the company. Vodafone has a debt of Rs 9,567 crore with Indus Towers, as of Q2FY23.

On January 25, Indus Towers said the new payment option suggested by the company was in a  “dynamic” state as Vodafone had not responded to the proposal. In Q3FY23, Indus Towers reported a net loss of Rs 708 crore after making a provision of Rs 2,298.1 crore for doubtful recovery from Vodafone. Vodafone’s inability to raise capital is proving to be an endless loop of distress for the company and other service providers in the telecommunication field.

Incurring debt to keep on building: Capex to rise on 5G infra spends, debt to go up

IIFL Securities suggests that capex would peak in 2023 as companies gradually roll out 5G networks across the country. Reliance Jio is planning to complete the rollout of 5G across India by the end of 2023, while Airtel is aiming to cover 5,000 towns and cities by March 2024. Although these are positive moves, they will put pressure on the debt levels.

In FY22, Reliance Jio’s debt levels doubled as the capex for the company increased by more than 3.9X YoY. Airtel and Vodafone’s debt also increased in FY22, which is likely to go up further in FY23.

Tariff hikes in 2G and 4G, growth in non-wireless business segments and an increase in capex to boost 5G monetization are the key events to watch out for in 2023-24. Recently Bharti Airtel started tariff hikes in Haryana and Odisha circles and analysts expect the company to lead the race in tariff hikes.

However, Airtel’s MD and CEO Gopal Vittal also says that tariff hikes cannot come unilaterally or Airtel might lose some market share. According to CLSA, tariff hikes along with data penetration will drive ARPU growth for telecom companies. It will be interesting to see how the capex trends work out, given the high debt levels of these companies.

This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.