India’s Telcos Invest Hard For 5G-fuelled Growth That’s Some Time Away
The much-hyped 5G technology has finally arrived in India, promising faster internet speeds and better network services. For India’s telecommunications companies (telcos) offering 5G services, the arrival of 5G promises better growth prospects. It also signals the beginning of significant capital investment.
Telcos in India committed Rs 1.5 trillion on 5G technology before the rollout even started. And this was only on the spectrum auction that concluded in August 2022.
So far, the telcos that we rate – Bharti Airtel and Reliance Industries (under which India’s leading telco Reliance Jio Infocomm sits) – have stomached spectrum purchases without detriment to their credit ratings. Although we consider spectrum liabilities to be debt-like obligations that are added to the telcos’ adjusted debt, the spectrum payments can be staggered over 20 years. Also supporting the ratings is moves by both companies to fortify their balance sheets ahead of the auction via tariff hikes and aggressive deleveraging through asset sales and equity raisings.
As the rollout of 5G next-generation wireless services gathers pace across the country, much more needs to be spent on building or leasing networks, telecom towers, and equipment. Over the next few years alone, Jio has earmarked Rs 2 trillion (including Rs 880 billion of spectrum it bought) to roll out 5G services.
Naturally, the question for many in the market has shifted to investment payback for these sizeable 5G investments – the ‘how’ and the ‘when’.
Although 5G technology is still in its relative infancy, the potential uses of 5G networks go far beyond mobile devices. By extension, the monetisation opportunities for India’s telcos will too. Indeed, the fast
speeds, high capacity, and low latency of 5G, combined with India’s vast population and wireless market, translates into vast possibilities. These range from self-driving vehicles to smart factories.
Yet, significant returns are unlikely to come soon for the telcos. For now, 5G will likely be used to offer consumers faster mobile and fixed-wireless access. Bharti Airtel and Jio have both launched 5G services in limited cities in early October 2022, with Jio seeking to achieve 5G coverage across the country by the end of 2023, and Bharti Airtel by March 2024. The most meaningful returns lie with 5G industrial use cases. And, despite the market potential, these are still in development.
Whatever the pace of rollouts, average revenue per user (ARPU) and earnings will undoubtedly rise with 5G services. While Bharti Airtel and Jio have not charged a premium on 5G services, they eventually could, as we have seen in some other countries where 5G services have been established since a long time. Even if India’s telcos choose not to charge a premium, ARPU and earnings will benefit from 5G services. This is because data use typically rises with migration to 5G.
The use of 5G services, in and of itself, doesn’t consume more data. But it enables more data-heavy options, such as better-quality video streaming. This better user experience could also, in turn, encourage more consumption and drive upgrades to higher-priced plans that offer more data. All else being equal, we estimate every Rs 10 climb in ARPU translates into an approximate five per cent rise in revenue.
What’s more, we view the Indian telco market’s competitive landscape as supportive of the ARPU gains that 5G services will bring. Competition among Indian telcos has become more rational, after significant market consolidation over the past few years. ARPUs have been rising for Indian telcos over the same period, supported by tariff hikes and growing data demand.
That said, the speed of 5G migration in India will depend on the availability and uptake of 5G-enabled devices, which remains limited. In countries such as Korea, China and Japan, 5G adoption only reached an average of about a quarter of the subscriber base after two years.
There are other near-term challenges for players in this space. Weaker consumer sentiment, amid protracted inflation or a weaker economic environment, could encourage consumers to temporarily delay upgrades to advanced networks and to 5G-enabled devices. This could slow 5G migration.
Despite the lag between investments and significant payback, we expect the balance sheets of our rated telcos, Bharti Airtel and Jio, to remain resilient. Indeed, we believe both telcos will maintain earnings momentum, with ARPU steadily rising from a low base. This will pad their balance sheets for additional 5G investments as they race to dominate next-generation digital services in India.
At the same time, we expect the rated telcos will continue to carefully manage their leverage, with capital investments remaining elevated. Although they should deleverage naturally as earnings rise, they could sell assets or raise equity as financial levers, if the need arises. We note that the telcos have attracted investments from the likes of Google and Meta platforms (previously Facebook) over the past few years. These investments signal the improving health of the Indian telco market, and the potential that’s to come from a new era of digitally connected societies and industries.
About the Author: The author is Associate Director at S&P Global Ratings
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