Telecom companies may push their average revenue per user (ARPU) higher by 25% over the next 6-12 months to achieve a sustainable return on capital employed (RoCE) of 10%, said a Crisil report.
The report noted that though operators went for a significant tariff hike in December 2019, intense competition over the past three years, heavy capital expenditure (capex) to roll out 4G networks, and pending AGR liabilities have weakened their balancesheets. Therefore, increase in ARPU will be essential to strengthen credit profiles, it added.
"Telecom companies (telcos) have a compelling reason to push average revenue per user (ARPU) up by 25% over the next 6-12 months to achieve a sustainable return on capital employed (RoCE) of 10%, given their abysmally low returns at present and increased liability on account of adjusted gross revenue (AGR) dues," the report said.
Tariff hikes, rising 4G adoption and increasing data consumption by adopting content-led bundled pricing strategies could help boost ARPU growth.
"That could, in turn, beam up profitability, which will also help telcos invest in 5G networks over the medium term. Had the AGR liability not panned out as it did, the tariff hikes undertaken in December 2019 could have improved the industry's RoCE to 7% in fiscal 2021 and to 9% in fiscal 2022, from lows of 3% in fiscal 2020," it said.
With the Supreme Court's final judgement on the AGR case in place, telcos have to bear AGR liabilities of Rs 1.15 lakh crore, which is expected to erode the benefits of the tariff hikes implemented last fiscal and bring the RoCE back to 4-5% this fiscal, a Crisil estimate showed.
Sachin Gupta, Senior Director, Crisil Ratings, said, "Our base case assumes monthly ARPU reaching Rs 175-180 by next fiscal from Rs 140 in the first half of the current fiscal so as to generate a sustainable RoCE of 10%.
"Of course, this will depend on competitive intensity, but it can crank up industry revenue to over Rs 2 lakh crore next fiscal, or a third more than the Rs 1.5 lakh crore seen in fiscal 2020, despite muted subscriber growth."
Apart from tariff hikes, the ARPU will also benefit from the increasing data consumption due to proliferation of work from home, video conferencing and other forms of online business communications, along with a big uptick in over-the-top streaming services amid the pandemic, the report noted.