AGR Dues Nullified the Advantage of Tariff Hikes for Telcos: Crisil

AGR dues have brought down the ROCE for the telecom industry even after undertaking a tariff hike last year in December

By November 4th, 2020 AT 3:59 PM

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Adjusted Gross Revenue (AGR) dues have nullified the advantage for the telcos which tariff hike on December 2019 had created, said Crisil Research. As per an ET Telecom story, the company’s return on capital employed (ROCE) has dropped because of the AGR dues liability. The tariff hike should have increased it, but because of the AGR dues, the effect of tariff hike is rendered useless for when the ROCE of the telcos is concerned. The ROCE has been pulled down to 4%-5% for the telcos instead of increasing further. More on the story ahead.

AGR Dues Have Brought the ROCE for the Companies Down

The rating firm Crisil said that if the AGR dues were not there, tariff hikes undertaken would have helped the industry in increasing the ROCE to 7% in 2021 and 9% in 2022. The ROCE had dropped as low as 3% for the sector in the fiscal year 2020.

This is why the network operators now need to increase the average revenue per user (ARPU) by 25% between Rs 175 and Rs 180 within the next 6 to 12 months. Growing the ARPU would help the operators in achieving ROCE of 10%.

Crisil further 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.”

The analysts at Crisil believe that a Rs 1 addition in the ARPU of the telcos will increase the Ebitda (earnings before interest, tax, depreciation, and amortisation) of the industry by Rs 1,000 crore. This will be because of the high operating leverage of the industry.

Thus if the ARPU were to increase by 25% for the industry, it would double the Ebitda to Rs 79,000 crore in the fiscal year 2022 as compared to Rs 38,500 crore in the fiscal year 2020.

Nitesh Jain, Director, Crisil Ratings said, “It is pertinent to note that despite getting relief in AGR payment terms, at this juncture, sponsor support, sizeable tariff hikes, and prudent capex would remain crucial to support the credit profile of telcos.”

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Tanay is someone with whom you can chill and talk about technology and life. A fitness enthusiast and cricketer, he loves to read and write.

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