The capital expenditure on 5G by Indian telecom giants Reliance Jio and Bharti Airtel is expected to decrease from 37% of revenue in the previous fiscal year to 35% in the current fiscal year, according to a research report by Fitch Ratings on December 2. While this reduction is noted, Fitch points out that it remains high and will constrain the generation of free cash flow. Fitch anticipates a modest improvement in the companies’ average net debt to Ebitda ratio, with strong Ebitda growth supporting deleveraging. The ratings firm predicts an expansion in the sector’s average Ebitda margin due to higher average revenue per user, lower spectrum usage charges, and costs as 5G drives cost efficiencies.
Fitch expects limited competition, projecting that Bharti and Jio will capture 83-85% of the revenue of private telcos during FY24-FY25. It forecasts that the two companies will add 10 million and 20 million subscribers, respectively, in 2024. The regulatory environment is expected to remain stable, with Fitch mentioning the risk of adverse tax rulings by the Supreme Court.
According to Fitch, Jio is investing $13-14 billion in rolling out its 5G standalone network, while Airtel is investing $3-4 billion in 5G, in addition to the $5 billion commitment for spectrum in 2022 for deploying a 5G non-standalone network. Fitch identifies slow 5G adoption as a key risk that could impact ARPU growth and cash generation. The business case for 5G is expected to remain limited in the short-to-medium term as most current applications can be served by 4G speeds.
Furthermore, Fitch notes that the device ecosystem needs to evolve for higher 5G adoption in India’s price-sensitive market, given the low penetration of 5G devices. Telcos have priced 5G at similar levels to 4G, aiming to boost ARPU by enticing subscribers to increase data usage with 5G. Fitch anticipates limited tariff hikes due to high inflation and central elections in the first half of 2024. Expensive 4G and 5G smartphones may also discourage feature phone users from upgrading to higher-priced plans, inhibiting higher data consumption.
Despite these challenges, Fitch suggests that higher subscriber additions and a 10% increase in monthly ARPU on higher data consumption will lead to a 10% growth in revenue and Ebitda for Bharti Airtel and Reliance Jio next year. In September, data consumption in India stood at 21-22 GB, ranking among the highest in the Asia-Pacific region.
