Telecom companies (telcos) have a compelling reason to push average revenue per user (ARPU) up by 25% over the next 6-12 months to achieve a sustainable return on capital employed (RoCE) of 10%, rating firm CRISIL has stated.
According to the ratings firm this was given their 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, increase in ARPU will be essential to strengthen credit profiles," CRISIL has stated.
Tariff hikes, rising 4G adoption and increasing data consumption by adopting content-led bundled pricing strategies could help boost ARPU growth, according to Crisil.
That could, in turn, beam up profitability, which will also help telcos invest in 5G networks over the medium term.
Says Sachin Gupta, Senior Director, CRISIL Ratings, "Our base case assumes monthly average revenue per user reaching Rs 175-180 by next fiscal from Rs 140 in the first half of the current fiscal so as to generate a sustainable RoCE of 10%. Of course, this will depend on competitive intensity, but it can crank up industry revenue to over Rs 2 lakh crore next fiscal, or a third more than the Rs 1.5 lakh crore seen in fiscal 2020, despite muted subscriber growth."
Says Nitesh Jain, Director, CRISIL Ratings, "The debt-to-Ebitda ratio will remain high at above 4 times in fiscal 2021 as the sizeable AGR liabilities will continue to weigh on the credit profiles of telcos. But, it is pertinent to note that despite getting relief in AGR payment terms, at this juncture, sponsor support, sizeable tariff hikes, and prudent capex would remain crucial to support the credit profile of telcos."