Signals around the 5G rollout

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Signals around the 5G rollout

February 22, 2023

CRISIL Ratings speakers: Rakshit Kachhal, Associate Director | Rounak Agarwal, Manager

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Key takeaways

ARPU: Average revenue per user; OTT: Over-the-top

• Higher ARPU amid muted overall wireless subscriber growth to drive revenue increase of 10-12% on-year in fiscal 2024 – Share of 4G subscribers in overall wireless subscribers to improve because of migration of 2G/3G subscribers to 4G technology – About 15-20% data subscribers may use 5G services by March 2024, given the lack of device ecosystem and evolving 5G use

cases

– ARPU expected to rise ~10% to Rs 190-195 next fiscal, driven by higher data consumption, customer up-trading; broad-based tariff hikes, if taken, would provide upside potential

– Surging data demand from rising OTT consumption and rising share of 4G subscriber mix should result in average data usage/sub/month rising to 23-24 GB in fiscal 2024 (from ~20 GB this fiscal)

• Telcos could capitalise on wireline broadband, too, given higher demand amidst rising preference for hybrid work model

• Ebitda could rise by ~Rs 15,000 crore to reach ~Rs 1.2 lakh crore in fiscal 2024, aided by improvement in ARPU

• Capex intensity to rise owing to front-loading of 5G capex; telcos to invest >Rs 1 lakh crore in fiscal 2024 itself

• Sector’s debt to rise to ~Rs 6.5 lakh crore in March 2024 as accruals would largely be utilised for capex

– Debt metrics to remain comfortable for the top two players, despite higher debt

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Growth drivers: Subscribers, data and ARPU

Section 1

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Overall subscription to be largely muted; active share to increase

Low rural tele-density indicates an opportunity for rural subscriber addition

323 372 445 498 536 518 523 530

596 533 589 672 645 624 623 ~620

163%

141% 140% 143% 149%

167% 161%

156%

138% 137%

130% 128% 126%

38% 40% 43% 48% 51% 58% 59% 57% 59% 60% 58% 58% 59%

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23P FY24P

Rural Urban Urban tele-density Rural tele-density

905 1,034 1,170 1,181 1,142 1,147 ~1,150

86.9%

87.4% 89.4%

% of active subscribers

~91%

Note: The figures in the slide refers to wireless subscribers only; P: Projected;

Source: TRAI, CRISIL Ratings

84.2%

919 83.3%

(million)

Wireless subscribers (million) 90.6%

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113 190

140 83

26

45 129

103

129 287

730 739 777

710- 720 16 150-

160

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23P FY24P

2G 3G 4G 5G

17% 26% 40% 70% 73% 76%

83% 74% 60% 30% 27% 24%

Data subscribers Voice subscribers

4G to continue to be the dominant technology in use in the near term

E: Estimated; P: Projected;

Source: Industry, TRAI, company reports, CRISIL Ratings

5G

<30%

of total annual smartphone shipments

are 5G enabled

Use cases

for retail or enterprise customers

have been identified, but are yet to see adoption

885-890

38%

62%

High cost

of 5G devices leading to slower adoption

~100 million+

5G enabled smartphones in India

About 15-20% of data users may use 5G services by March 2024

No. of subscribers in million

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Rising OTT consumption amid complimentary offerings by telcos to drive demand for data

30

90

165

196

~250

5.2

10.4

17.3

19.5

23-24

FY18 FY19 FY20 FY21 FY22 FY23P FY24P

Industry data traffic ('00 crore GB) Average data usage/subscriber/month (GB)

~28%

Rising 4G data users + pandemic-led

growth

Unlimited data plans at low price

75-80%

20-25%

Growth rate

VideosSocial Media*Search

Higher speed with 5G launch

Complimentary offerings by telcos

~4x

OTT: Over-the-top; P: Projected;

Online gaming

E-gaming

Wireless data traffic volume to rise by >25% next fiscal

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188

103

124

139

150 137

144

172

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

FY17 FY18 FY19 FY20 FY21 FY22 FY23

139

117 112 121

138 152

175

190-195

FY17 FY18 FY19 FY20 FY21 FY22 FY23P FY24P

Price war Removal

of IUC

Min recharge

plans

1^st tariff hike

2^nd tariff hike (Rs)

(Rs)

Quarterly movement of ARPUs* Annual ARPU trend

10%

15%

Rising data consumption Revision in base plan tariffs Increasing share of postpaid subscribers Complimentary OTT offerings Growth drivers

5% % of postpaid

subscribers 7%

….despite expectation of no broad-based industry-wide tariff hikes in near term

ARPU to increase by Rs 15-20 in fiscal 2024…

P: Projected; ARPU: Average revenue per user; IUC: Interconnect usage charges; *Includes top three players;

Source: Industry, company reports, CRISIL Ratings

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Source: International Telecommunication Union (via World Bank)

India way behind developed nations in wired broadband adoption

US residential wired broadband penetration stands at >80% compared with ~9% for India

~9%

>80%

Wired broadband penetration

Wired broadband penetration

Landline internet subscriptions per 100 people (as of 2020)

Wired broadband penetration is calculated as a percentage of households

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Increased use of hybrid work model, OTT consumption amid declining tariffs to aid growth

17 18 19 23 27 34 38-40

9%

7%

-2%

3%

4%

17% 21%

25% 18-20%

-5%

0%

5%

10%

15%

20%

25%

30%

0 5 10 15 20 25 30 35 40 45

FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23P FY24P

Wired broadband subscribers (Mn) Growth rate

42%

13%

5%

8%

27%

Pandemic

13%

17%

23%

7%

37% Others

P-5 P-4 P-3 P-2 P-1 Market share

~825 ARPU trend for a private telco (Rs) ~625

+18%

+4%

Cheap wireless service hindered growth

P: Projected;

Higher wired broadband adoption to unlock new growth opportunity

Wired broadband subscribers (million)

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1,662

1,949

2,080

2,412

2,650-2,700

-15%

-6%

8%

16%

7%

16%

10-12%

FY18 FY19 FY20 FY21 FY22 FY23P FY24P

Industry revenue (Rs '00 crore) Growth rate (RHS)

Wireless services revenue Wireline services revenue

140

162

202

245-250

FY19 FY22 FY23P FY24P

(Rs ’00 crore)

Full impact of last tariff hike to result in ~16% growth in revenue this fiscal Even if tariffs are further reduced by ~10% from current levels, revenue could grow by ~20% in fiscal 2024

~20% ~27%

% revenue from postpaid subs

Telecom wireless services revenue to grow 10-12% next fiscal

Wired broadband revenue could provide upside potential to overall industry top-line growth

P: Projected;

Source: TRAI, company reports, CRISIL Ratings

1^st tariff hike

2^nd tariff hike

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Profitability, capex and credit outlook

Section 2

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429 338 298

719

852

1032

1,177 32%

26% 23%

36%

43% 48% 49% ~50%

FY17 FY18 FY19 FY20 FY21 FY22 FY23P FY24P

25%

32% 34%

37% ~39%

27% 26% 27%

14% 11% 4%

11%

11% 12%

3%

9%

6%

36% 43% 48%

FY20 FY21 FY22

Network expenses Access charges Licence Fee & SUC Employee cost Sales & other expense EBITDA

160 Leases

P: Projected; RoCE: Return on capital employed; IUC: interconnect usage charges; Source: Company reports, CRISIL Ratings Analysis includes Bharti Airtel (India mobile services), Vodafone Idea and Reliance Jio

Sector RoCE (%)

2.5 6.6 8-9

5.5 9.6 11-12

Top 2 telcos RoCE (%)

362

522

Reported Ebitda margin

Cost structure (as a percentage of revenue)

(Ebitda in Rs ’00 crore)

… while Ebitda margin could improve by ~200 bps, despite higher 5G network expense

Mobile services Ebitda to rise by ~Rs 15,000 crore next fiscal…

Cut in IUC

Adj. Ebitda margin

Licence fee and SUC Sales and other expense

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790 773 799 920 1027

830

490 537 700

850- 900 320

610

786

1500

150-200

FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23P FY24P

Network capex Spectrum capex

Capex for mass 4G rollout 5G capex begun

• While 5G capex cycle is expected to be front-loaded, it would see shorter cycle as telcos have already spent heavily on 4G networks

• Unlike earlier tech migrations, capex intensity likely to moderate over the medium term as 5G rollout would lead to additional investments in the existing network

P: Projected;

Source: Company reports, industry, CRISIL Ratings

58% 57% 59%

71%

80%

58%

29% 30% 33% 36-38%

Capex intensity

~2x

(Rs ’00 crore)

Given adequate availability of spectrum with telcos, no major spectrum investments expected next fiscal

Telcos to invest over Rs 1 lakh crore next fiscal

Capex intensity is calculated as network capex as percentage of revenue

1

2

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1,139

2,320 2,405 ~2700

3,250-3,300

0.9 1.4 1.7

2.4 2.7 2.8 3.0 3.2 3.6

4.2 4.5

0.0 1.0 2.0 3.0 4.0 5.0

0 500 1000 1500 2000 2500 3000 3500

FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23P FY24P FY26P

Number of sites ('000) BB sites/ BB towers (Times) 441

663 713 752 ~770 800-820

FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23P FY24P FY26P

Mass 4G launch

Mass 5G rollout

~35%

55-60%

Number of towers (in ‘000)

P: Projected; BB: Broadband;

Source: Industry, company reports, CRISIL Ratings

~5%

Fiberisation level

Tower count could touch ~8.2 lakh, while ‘fiberisation’ levels could reach 55-60% by fiscal 2026

Fewer macro tower additions; sites, fiberisation to go up significantly

• 5G launch would provide opportunity for towercos to leverage street furniture for deployment of small cells for densification of networks

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3,187 3,863 4,578 6,334 6,500 –6,600786

1,500

Debt Capex Accruals Equity Unpaid AGR dues Others Debt Spectrum acquisition Capex Accruals Others Debt Spectrum acquisition Capex Accruals Others Debt Spectrum acquisition Capex Accruals Others Debt

FY21 FY22 FY23P FY24P FY24P

(Rs ’00 crore)

52% 16% 16% 16%

Deferred spectrum liabilities AGR liabilities Lease liabilities External debt

Debt composition

P: Projected; Source: Company reports, CRISIL Ratings

Analysis includes Bharti Airtel (Consolidated), Vodafone Idea and Reliance Jio

Additional leases 5G spectrum

auction

Accrual to be largely utilised for 5G network capex next fiscal; equity infusion to remain key monitorable

Sector debt could rise to ~Rs 6.5 lakh crore in March 2024

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6.4

7.3

4.1

4.8

4.0-4.3

5.1 5.2

2.7

3.3

2.7-3.0

FY18 FY19 FY20 FY21 FY22P FY23P FY24P

Top 3 players Top 2 players

2.2

1.4

2.5 2.7 2.8-3.0

3.4

1.9

4.1

4.6

4.8-5.0

FY18 FY19 FY20 FY21 FY22P FY23P FY24P

Top 3 players Top 2 players

P: Projected; Source: Company reports, CRISIL Ratings

Analysis includes Bharti Airtel (Consolidated), Vodafone Idea and Reliance Jio

With the expected improvement in profitability, interest cover as well as leverage should improve next fiscal

Debt to Ebitda (times) Interest cover (times)

Impact of additional spectrum debt

Amid additional spectrum liabilities, improvement in operating profit to support credit profile

Debt protection metrics to improve next fiscal

Debt refinancing at lower cost

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