With 5G not being offered at premium pricing currently, return on capital employed (RoCE) for telcos might see limited upside, according to India Ratings and Research (Ind-Ra).

The agency expects telecom companies to increase their capex intensity for the next 12 months to deploy 5G services at an accelerated pace.

Ind-Ra does not foresee broad-based tariff hikes materialising in the near to medium term, given the heightened competition amid telecom operators' recent attempts to acquire high-average revenue per user (ARPU) customers and aggressive 5G roll-out plans.

However, ARPU may continue to exhibit organic growth of around 5% year-on-year in FY24 due to likely indirect tariff hikes resulting from pricing actions in low tariff bands and subsequent subscriber churn and continued rising composition of data users, the ratings agency says.

Reliance Jio Infocomm's ARPU for the December quarter stood at ₹178.20. Rival Bharti Airtel's ARPU for the quarter stood at ₹193 on the back of the telecom operator's continued focus on premiumisation.

Reliance Jio and Airtel may continue to acquire market share from Vodafone Idea, especially in the high-ARPU customer base, the ratings agency says.

Ind-Ra says the outlook for the telecom tower industry remains deteriorating, given its dependency on liquidity-strapped Vodafone Idea, rising receivables, and benefits of 5G roll-out being back-ended.

Impact of delayed receivables on tower companies' credit profile should be much worse, given their inability to delay fuel payments and lack of visibility on recoverability of pending dues and large provisioning done over the past one year, the ratings agency says.

Continued capex intensity and aggressive dividend pay-out policies remain additional negatives, cautions Ind-Ra.

Indus Towers has already written off about ₹50 billion of receivables due from Vodafone Idea (contributing over 40% to Indus Tower's total revenue) in the first nine months of FY23 and has collected only part of the recurring dues from Vodafone Idea, the ratings agency says, adding that the ability of Vodafone Idea to raise funding remains a key monitorable for tower companies.

Ind-Ra has maintained a 'neutral' outlook on the Indian telecom sector for FY24.

The outlook for telecom equipment manufacturers is 'neutral', given the strong demand drivers – domestic and exports – and supportive regulatory environment including the production-linked incentive (PLI) scheme, says Ind-Ra.

With only two to three years since announcement and implementation, while some players have already received PLI benefit for one year, a large portion of the benefit will be received in the coming years, which is expected to support their margin profile, the ratings agency says.

While the benefit of PLI scheme is extended by the government till FY26, the ability of the companies availing this benefit to maintain their margin profile after FY26 remains to be seen, it adds.

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