The Indian telco sector is poised for the next stage of repair. S&P Global Ratings believes rising stability in the sector will boost earnings and solidify credit metrics.

India's telco market is now more securely a three-player competition. Vodafone Idea Ltd.'s recent equity raising has bolstered its viability. We assume that the two biggest entities--Bharti Airtel Ltd. (BBB-/Stable/--) and Reliance Jio Infocomm Ltd.--will now focus less on market share gains, and more on improving profits and improving their balance sheets. This will likely involve above-average earnings growth and ample access to fresh capital.

The telcos have boosted their average revenue per user (ARPU) over the past three years. The gains mainly reflect tariff hikes and rising demand for fast data. That said, in an industry defined by intense rivalry, steep spectrum costs, and unexpected regulatory shifts, an issuer's financial cushion will remain key to its long-term viability.

The Playing Field Could Become More Level

Subscriber growth could slow for Bharti Airtel Ltd. and Reliance Jio Infocomm Ltd. if Vodafone Idea Ltd. improves its network quality.  Third-placed Vodafone Idea has recently made progress in managing its heavy debt load, which has limited its ability to invest in network quality. Vodafone Idea has raised about Indian rupee (INR) 215 billion in the past three to four months. Most of the funds came from an INR180 billion follow-on public offering that concluded in April 2024. Vodafone Idea is further looking to issue shares valued at INR24.6 billion to its equipment vendors Nokia and Ericsson to settle outstanding payments.

These actions can provide a respite to Vodafone Idea's liquidity pressures, and enable the telco to improve its network quality. We estimate that as of March 31, 2024, Vodafone Idea's ratio of debt to EBITDA stood at about 15x, with adjusted debt of about INR2.5 trillion.

Subscriber outflow from Vodafone Idea has helped market leader Reliance Jio and second-place Bharti Airtel. Vodafone Idea, in third place, was once market leader with close to 35%-40% of mobile subscribers. That was in late 2018 when Vodafone India merged with Idea Cellular Ltd.

It has since steadily lost market share, with 19% of mobile subscribers as of March 31, 2024. The persistent subscriber outflow created a circular problem for Vodafone Idea--its cash flow from operations was not enough for network enhancements to retain subscribers and, in turn, it has lost subscribers because of its network quality.

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An improvement in Vodafone Idea's network quality could stem its subscriber churn. We expect that its peers' subscriber growth could slow as a result.

Tariff Hikes Will Bolster Earnings

A stabilized three-player market will likely boost earnings.  We believe Bharti Airtel and Reliance Jio may now focus on improving returns. This would be a shift from their prior stance of market share gains. Vodafone Idea's recent equity raising will likely let the telco fortify its network and narrow the quality gap with the other incumbents. It could make Vodafone Idea a more viable competitor, and thus a less attractive target.

Furthermore, Bharti Airtel and Reliance Jio have just gone through a wave of massive network investments in the past few years. The former has reiterated its stance that mobile industry monthly ARPUs are unsustainable and need to reach INR300, and that it could take a few rounds of tariff hikes to reach that level.

We expect ARPUs to rise faster, after having slowed in the past 12-24 months. On June 27, 2024, Reliance Jio took the first step and announced an increase in tariff prices. Across its popular plans, tariffs rose 12.5%-27% as of July 3, 2024. Bharti Airtel and Vodafone Idea followed with their own tariff hikes, with the former raising rates by about 10%-21% on the same day, while the latter hiked tariffs 10%-23% a day later.

Table 1

The previous across-the-board tariff hike was in November 2021. Since then, the telcos have taken smaller steps to boost ARPU, such as axing the lowest-priced tariff plans. The slowdown is also despite the introduction of 5G services by Bharti Airtel and Reliance Jio, as the telcos have not been charging a premium on 5G services.

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We believe that trading down to lower-priced plans will be minimal once consumers get used to the higher tariffs--data consumption habits are sticky. Monthly data per usage per customer, as disclosed by the three main telcos, have risen to an average of 22.4 gigabytes in the quarter ended March 31, 2024. This is about 14% higher than a year ago, and about 57% higher than three years back.

However, we believe the telcos will immediately lose some subscribers after hiking tariffs. The higher cost will push some consumers carrying multiple SIMs to trim their plans. Most of the tariff hike impact will likely materialize within the next two quarters, as the existing plans play out their remaining validity periods.

We estimate that every INR10 increase in ARPU will translate into an annual EBITDA boost of INR25 billion-plus for Bharti Airtel, and INR30 billion-plus for Reliance Jio. We project that the tariff hikes alone will add at least 5% to Bharti Airtel's EBITDA in fiscal 2025, and 10% in fiscal 2026, as compared with our previous projections.

Bharti Airtel and Reliance Jio Will Likely Moderate Network Spend

We believe further significant spectrum buys are unlikely in the next 12-24 months.   Until more returns can be reaped from 5G, the telcos are unlikely to pour greater capital into acquiring more spectrum licenses.

This was apparent in the muted appetite for spectrum at an auction that concluded on June 26, 2024. The three telcos bought INR113 billion of airwaves. This translates to 141.4 megahertz (MHz) of spectrum, just 26.5% of the 533.6 MHz put up for sale. Additionally, 37% of the amount spent pertained to the renewal of expiring spectrum. The expenditure contrasts starkly with the INR1.5 trillion that the three main telcos jointly spent on 5G spectrum in 2022.

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We believe Bharti Airtel's smaller 5G spectrum holdings (as compared with Reliance Jio) do not put the firm at an immediate disadvantage. Reliance Jio bought the pan-India 700 MHz spectrum in the 2022 auction, while Bharti Airtel did not. This alone cost Reliance Jio about INR400 billion.

The 700 MHz spectrum can allow for wider coverage, complementing the faster speeds but shorter reach of the mid- and high-band spectrums. It is particularly useful for covering sprawling rural areas, as well as indoor areas, which higher-band spectrums cannot reach. We believe that Bharti Airtel has flexibility to buy additional sub-gigahertz spectrum when 5G use-cases pick up, if needed at that point.

Capex should ease slightly for the top two telcos with 5G rollout complete.  While Vodafone Idea has only just completed minimum 5G rollout requirements, Bharti Airtel and Reliance Jio began that journey at end-2022; both have completed their respective pan-India rollout of 5G networks.

Bharti Airtel's capex likely peaked in fiscal 2024. As compared with cash capex of INR382 billion in fiscal 2024, we expect a slight moderation to INR350 billion-INR370 billion annually in fiscals 2025 and 2026. The telco has shifted all capacity investments to 5G from 4G, which will ease wireless capex. Continued capex into the fast-growing home and enterprise segments in India, as well as its African operations, will prevent a steeper decline in capital investment.

In stark contrast, Vodafone Idea trails its peers on network investments.  The telco's cash capex averaged INR48 billion annually in the past five fiscal periods to fiscal 2024, ending March 31, 2024. We estimate this is only about 20% or less of the average Reliance Jio and Bharti Airtel spent in India over the same period.

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Similarly, Vodafone Idea's spectrum portfolio remains considerably weaker. As compared with the excess of 20,000 MHz of spectrum held each by Bharti Airtel and Reliance Jio, Vodafone Idea holds under 8,000 MHz of spectrum. The main difference lies with the 26 gigahertz (GHz) spectrum band, a millimeter wave band used for 5G services. The gap reflects the different stages of the telcos' 5G networks.

Bharti Airtel and Reliance Jio also have superior mid-band spectrum holdings. Vodafone Idea's lack of pan-India spectrum holdings across multiple bands will likely continue to weigh on its network consistency and coverage, whether for 4G or 5G.

The Worst Is Likely Over

In our view, regulatory risks have softened.  We believe the government and regulators are keen to maintain a market with at least three dominant private players. They have stepped in on several occasions to ease the heavy burden on Vodafone Idea. The most telling action, in our opinion, was when the government converted accrued interests arising from regulatory payments owed by Vodafone Idea into a one-third stake in the telco in early 2023.

The government also approved a relief package for the telco sector in September 2021. Among the reforms in the package were reductions to levies to be paid to the government by telcos on their revenue, the removal of a spectrum-sharing fee, and a four-year moratorium on the payment of statutory dues by telcos.

In addition, the government abolished spectrum usage charges on airwaves bought subsequently. These actions came after a 2019 ruling by the Supreme Court of India against telcos on the calculations of levies paid to the Department of Telecommunications of India, which resulted in massive regulatory charges.

The telcos can now attract fresh capital, and monetize on their prior period of heavy investing.  The Indian telco sector's turnaround story is exemplified by the funds investors have put into the sector in the past few years. The telcos had investor support even during periods of weakness, such as during fiscal 2020 when they raised capital--through rights issuance, qualified institutional placement and preference shares issuance--to repair their balance sheets after the regulatory lawsuit concluded. The telcos have raised over INR2 trillion of fresh funds in recent years, including Vodafone Idea's follow-on public offering.

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On top of these fresh funds raised by the telcos, Reliance Jio Platforms Ltd. (which holds 100% of Reliance Jio) raised about INR1.5 trillion in fiscal 2021 from investors including Google International LLC and Meta Platforms Inc. (via Jaadhu Holdings, LLC). We believe Reliance Jio is the largest subsidiary under Reliance Jio Platforms. Bharti Airtel also has yet to call the remaining 75% of its rights issue announced in fiscal 2022, which could raise close to INR160 billion.

The telcos' access to capital provides a safety net for them to better withstand whatever challenges lie ahead. These could include further spending on 5G networks and fiber, as data consumption continues to rise and as 5G industrial use-cases become more viable.

Easing regulatory risks, slowing investments and good access to capital. These are the ingredients for a stabilizing Indian telco sector. We believe this is also the preface to the next phase of market repair.

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