It seems that the telecom operators can heave a sigh of relief over the few quarters. The recent estimates from the ratings agency ICRA show that the capital expenditure (capex) costs of the sector is likely to come down by 30-35 per cent to Rs 65,000 crore in 2019/20. In the last financial year, the players collectively incurred a capex of over Rs 1 lakh crore, primarily into expanding their 4G network. ICRA analysis says that 4G has already achieved a sizeable penetration, and the peak capex cycle for the sector is over.
But this breather is expected to be short-lived as the sector is expected to swing into action with the expected launch of next-generation 5G services next year. The 5G works on 3.5 GHz (gigahertz) which is a high-capacity band with low propagation.
Because the mid-band radio signals (3.5 GHz) have weaker propagation as compared to 4G bands, the operators will have to create denser network to deliver high-speed data. Denser network means that the operators will have to install more base stations in close proximity along with fiberisation of telecom towers. At present, just over 25 per cent of the towers are fiberised which is much lower than the global average of 70 per cent.
"The telco will require millions of 5G sites. It's going to be a big capex game - much bigger than 4G. Of course, the operators will use a combination of 4G and 5G to serve customers since a lot of IoT (internet of things) applications can also run on a decent 4G network," says an industry expert.
As per ICRA, the capex intensity of operators has been significantly high over the last few years. The capex-sales ratio of telco has been over 50 per cent in comparison to 17-18 per cent as per the international standards. To simplify, for every Rs 100 earned by telcos in the recent years, over Rs 50 have gone into building networks. That kind of capex is unsustainable, and seriously undermines the abilities of telcos to post profits.
Besides capex, telcos have to keep buying spectrum from the government, which is another major cost element for them. The telcos have spent over Rs 3.5 lakh crore in acquiring spectrum across different bands in the past six rounds of auctions between 2010 and 2016. For the next round of auctions, telecom regulator TRAI (Telecom Regulatory Authority of India) has recommended the base price of Rs 4.9 lakh crore for 8,644 megahertz (MHz) of spectrum, including 5G radiowaves. This kind of spectrum price coupled with equally-intensive capex will add to the existing sky-high debt levels of the sector. Though telcos have expressed their reservations in acquiring fresh spectrum, and have asked for deferment of the auction.
The rise in capex, especially during the 2017-2019 period, has coincided with haemorrhaging of revenues and net profits across telcos. Reliance Jio's disruptive tariffs forced incumbent telcos such as Bharti Airtel and Vodafone Idea to bring down their prepaid and postpaid plans to arrest the fall in the subscriber base. Of late, there has been some improvement in ARPUs (average revenue per users) of incumbents who are upgrading their subscribers to higher-value plans through a series of measures.
"The organic cash generation... has remained insufficient to cover the debt repayment obligations and capex needs, resulting in additional funding requirements and debt levels witnessed further increase in 2018/19 to around Rs 5 lakh crore. However, 2019/20 has witnessed some degree of deleveraging and with some of the plans on the anvil for debt reduction, the debt is expected to reduce to around Rs 4.25 lakh crore in March 2020," says the ICRA note.