While the 5G capex investments of Indian telecom operators Reliance Jio and Bharti Airtel will taper from 37% (of revenue) in FY23 to 35% in FY24, their free cash flow (FCF) generation is expected to remain limited, Fitch Ratings said in a research note on Friday.
Average Ebitda net leverage should improve slightly to 1.9x-2.0x (FY23: 2.1x), as strong Ebitda growth supports deleveraging, despite higher 5G capex. However, we believe FCF generation will remain limited on high 5G capex investments of 35% of revenue (FY23: 37%), Fitch said.
It expects the sector’s average Ebitda margin to expand by 50-100 bps in FY24 (FY23: 42%) on higher ARPU as well as lower spectrum usage charges and costs, as 5G drives cost efficiencies. Competition is likely to remain limited, as we expect Bharti and Jio to garner 83-85% (FY23: 80-82%) of the revenue of private telcos during FY24-FY25. We forecast the two peers to add 10 million and 20 million subscribers, respectively, in 2024, the brokerage said, cautioning the regulatory environment should remain stable, barring adverse tax rulings by the Supreme Court.
According to Fitch, Jio is investing $13-14 billion to roll out its 5G standalone (SA) network, whereas, Airtel is investing $3-4 billion on 5G, in addition to the commitment of $5 billion made towards spectrum in 2022 for deploying a 5G non-standalone (NSA) network.
It identified a slow 5G adoption as a top risk, which may cause ARPU growth to stutter and affect cash generation. 5G business case, too, is expected to remain limited in the short-to-medium term given that most current applications can be served by 4G speeds.
Further, Fitch said the device ecosystem needs to evolve for higher 5G adoption in India’s price-sensitive market, given low penetration of 5G devices.
