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Capex intensity to witness moderation till the time 5G kicks in, says ICRA

September 26, 2019
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With the telecom industry achieving a sizeable penetration for 4G, the peak capex cycle for Indian telcos is over. As per an ICRA note, here on, the capex intensity is expected to witness moderation till the time there is a technology upgrade to 5G. Capex levels remained high in the past as the telcos were expanding their 4G outreach. The capex intensity, as measured by the capex/sales ratio has been significantly higher over 50 per cent compared to international standards of 17-18 per cent, especially in the last few years.

Explaining this further, Ankit Jain, assistant vice president, corporate ratings, ICRA, said, “The capital expenditure incurred by the telecom operators for expansion and upgradation of network has remained high on account of increasing data requirements, changes in technology and spectrum acquisition. Spectrum acquisition accounts for a majority of capex and thus debt for the industry. During FY2019, the industry incurred a capex of more than Rs. 1 trillion. Such a high capex, especially in light of the headwinds faced by the industry in terms of pressure on revenue and profit generation and high debt levels, led to pressure on company balance sheets.”

The telecom industry is highly capital intensive as it requires an extensive network infrastructure to provide fixed line and wireless services. While the capex cycle for fixed line services is front loaded, it is ongoing for wireless services. With every passing technology, the speeds of data delivery and overall data requirements are increasing. The last few years have witnessed an explosion of mobile data consumption, which along with substantial increase in total wireless internet subscribers, has mandated the telcos to consistently invest heavily in their networks. Apart from the network related capex, telcos are also required to acquire the rights to use the spectrum, which is the basic raw material of the industry. Over the six rounds of auctions, the industry has spent more than Rs. 3.5 trillion in acquiring around 3,100 MHz of spectrum across various bands, thus adding to the capex intensity and debt of the industry.

According to ICRA, high capex levels, in conjunction with the headwinds faced by the industry amid intense competition, has kept the cash flows under pressure. The financial profile is further exasperated by the elevated debt levels. The organic cash generation of the industry has remained insufficient to cover the debt repayment obligations and capex needs, resulting in additional funding requirements and thus debt levels witnessed further increase in FY2019 to around Rs. 5 trillion. However, FY2020 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 trillion as of March 2020.

“The average capex intensity for Indian telcos has been amongst the highest over the 2017-2019 period. Over the last 5 years, the telcos were focusing on expanding their 4G networks and the total capex by the top telcos, including spectrum purchases was around Rs. 5 trillion. The capex intensity for Indian telcos over the last 3-year period has been in excess of 50 per cent, as against world average of 17-19 per cent. High capex intensity is attributable to sizeable capex as well as pressure on sales amid competition. During FY2019, the Indian telcos incurred a capex of more than Rs. 1 trillion. Now with 4G capex summiting and 5G still some time away, the capex levels are expected to witness temperance to around Rs 650 billion for FY2020, which coupled with steady improvement in sales post the uptick in ARPU levels would result in decline in capex intensity to around 30-35 per cent, although it will still remain higher than the international peers,” adds Mr. Jain.

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