With the dawn of 5G telephony, political and technological changes combine to create a springboard for higher national demand for telecommunications equipment. But stress in the telecom service sector could reduce the potential.
About 85-90% of national demand for telecommunications equipment is fueled by investments in wireless networks from telecommunications operators. So, the equipment industry’s call for growth will be based on how much it invests – taking advantage of internal accrual accounting and debt.
The home equipment industry missed the previous wireless capital spending boom (capex) driven by aggressive deployments of 4G networks between fiscal years 2016 and 2021, as telecom operators relied heavily on suppliers in China and the rest of the world. other East Asian countries.
Imports accounted for about three quarters of the equipment demand of telecommunications operators. But the Indian government’s Open Radio Access Network (RAN) and Production Incentive Program (PLI) promise to ring in a new future.
PLI and 5G to boost the telecom equipment industry
Source: DoT, CRISIL research
Previously, RAN deployments, accounting for more than three-quarters of investments, remained proprietary in nature and, therefore, were not accessible to small vendors. The advent of open RAN – by ending the proprietary configuration – results in the disaggregation of hardware and software at radio sites. This would allow home equipment manufacturers to manufacture and innovate in individual modules (like antennas and remote radio heads), or more contemporary forms of radio nodes (like small cells). Globally, the deployment of open RAN is expected to gain traction starting in fiscal 2023, as investments in 5G increase.
5G networks, by their nature, require a lot of investment. They involve towers fiberizing levels of at least 70% (compared to 30 to 35% currently) and deployments of radio sites 4 to 20 times higher than 4G. This would lead to greater investments in optical and radio networks, respectively.
The PLI program was programmed long before the launch of 5G. It has the potential to reduce the share of telecommunications imports in aggregate demand to less than 50%.
The program, launched for the telecommunications equipment industry in February this year, allocates ~ Rs 12,200 crore as sales incentives generated in the base year (FY2020) and expects to generate an investment of Rs 3 000 to 4000 crore. This translates into an incentive / capex ratio of 4: 1, the highest of any PLI program.
With PLIs covering major telecommunications equipment except fiber optics, domestic equipment manufacturers could take advantage of a Rs 50,000 crore market opportunity, which is expected to double by FY 2025 .
But what could put a damper in the wheels is stress in the telecommunications service industry and low investment in research and development.
What is the level of stress among telecom operators?
In the last fiscal year, carriers saw improved operational metrics driven by December 2019 rate hikes, customer upgrades, and increased data usage amid the pandemic.
However, the delays in further tariff increases, the elimination of interconnection user fees and the impact of the second wave of Covid-19 turned out to be mixed for players in the first quarter of this fiscal year.
Bharti Airtel saw its subscriber base remain stable sequentially at ~ 32 crore. Its Arpu and Ebitda margins were respectively Rs 146 and 49.2%, against Rs 145 and 47.5% in the previous quarter. However, the subscriber base showed good growth over one year (15% in total and 33% for 4G users).
Reliance Jio saw 4% sequential growth in its subscriber base at ~ 44 crore. Its Arpu and Ebitda margin remained stable at Rs 140 and 46.9%, respectively, weighed down by the second wave.
Vodafone-Idea continued to see a deterioration in its operating parameters. Its subscriber base had fallen to 26 crore, a 5% drop sequentially. The Arpu and Ebitda margins were respectively Rs 104 and 40.5%, against Rs 107 and 45.9% the previous quarter. However, its 4G user base grew 8% in one year to 11 crore.
The pandemic has had a mixed impact on telecom operators
Source: Company reports, CRISIL Research
Despite industry consolidation over the past three years and a series of rate hikes in December 2019, Telecom Arpus are below fiscal 2017 levels.
Tariff increases and relief measures are essential for investments
Over the next few quarters, CRISIL Research predicts a moderate increase in Arpu, driven by larger customer upgrades and rate increases on low-end and postpaid plans. However, any significant increase in Arpu depends on price increases in the prepaid smartphone segment, which makes up over 70% of the telecommunications industry’s revenue.
Competitive pressures are blocking further increases. The industry is also considering a significant regulatory payment of ~ Rs 25,000-30,000 crore in FY2023, when the spectrum payment moratorium ends. At the same time, gamers are expected to gradually increase their investments in 5G, as auctions are likely next calendar year.
To meet all payment obligations and achieve the desired investment expenditure, actors will need to improve internal regularizations and raise additional funds.
Operating metrics are on the rise, but Arpu remains below FY 2017 levels
Source: Company reports, CRISIL Research
How could they contribute to it, if not through tariff increases? One solution would be a reduction in levies. Currently, telecommunications operators must pay license fees and spectrum usage fees of 8% and 3-5% of adjusted gross revenues, respectively. Lowering this combined expense from 11-13% to 6-7% could increase operating profits by 10-15%.
The fixing of floor prices in telecom tariffs could be another. This could allow all players to increase prices without any competitive pressure. A floor price of around Rs 20 per GB can result in the Arpu improving to Rs 175,180, even after assuming a drop in customers and data usage.
These measures would improve the cash flow situation of the actors, help them to raise additional funds to invest and, in turn, promote the success of the PLI program and improve the prospects of the industry.
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