Indian mobile operators’ capital expenditure (Capex) is expected to decrease to Rs 62,000-65,000 crore per annum over fiscal 2021 and 2022 from Rs 83,000 crore in fiscal 2020, due to heavy network Capex for 4G network expansion in the past four years.

Leading telecom operators include Reliance Jio, Bharti Airtel, Vodafone Idea and BSNL. Reliance Jio is the leading mobile service provider in terms of mobile subscribers.

Indian telcos are unlikely to incur any major investments for the 5G services at least for a year, rating agency Crisil said.

The returns on capital employed are low for telcos at present. The Supreme Court ruling on Adjusted Gross Revenue (AGR) has created huge liabilities.

Telcos need to boost their average revenue per user (ARPU) by at least 25 percent in the next year to be sustainable.

Apart from the mobile tariff hikes, which were last done in December 2019, the telcos will need to enhance the number of 4G mobile phone users opting for 4G offerings and bundle plans with content.

Competition over the past three years, heavy Capex to roll out 4G networks and fiber network, and pending AGR liabilities have weakened their balance sheets.

At present, return on capital employed (RoCE) needs to move up to 10 percent level from the 3 percent level in FY20.

“Telcos have a compelling reason to push ARPU up 25 percent over the next 6-12 months to achieve a sustainable RoCE of 10 per cent, given their abysmally low returns at present and the increased liability on account of AGR dues,” the rating agency warned.

The Rs 1.15 lakh crore to be paid in AGR dues will erode all the benefits of December’s tariff hikes and take the RoCE down to 4-5 per cent levels.

“Our base case assumes monthly ARPU 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 per cent,” Crisil senior director Sachin Gupta said.

Such a scenario will push the industry revenue by a third to Rs 2 lakh crore in fiscal 2021 as compared to financial year 2020’s Rs 1.5 lakh crore despite muted subscriber growth.

The Covid-19 pandemic will help the ARPU through 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.

Data usage per subscriber per month is expected to grow 28-30 percent to 15 gigabyte by the end of this fiscal.

A Re 1 increase in ARPU adds about Rs 1,000 crore to the telecom industry’s earnings before interest, tax, depreciation and amortisation (EBITDA), indicating high operating leverage.

Improvement in profitability, coupled with a sizable equity infusion of about Rs 1.7 lakh crore in fiscal 2020 had helped reduce the debt level to Rs 2.8 lakh crore as on March 31, 2020, from Rs 3.4 lakh crore a year ago.

“Despite getting relief in AGR payment terms, at this juncture, sponsor support, sizable tariff hikes, and prudent capex would remain crucial to support the credit profile of telcos,” Crisil director Nitesh Jain said.