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A deep dive into Indian telcos’ cost structure and unit metrics

Indian telcos’ EBITDA margins improved sharply in FY2019-23, led by 1) tariff hikes, 2) Ind AS 116 implementation, 3) change in the IUC regime, 4) lower SUC charges and 5) operating leverage. Among key expenses, network opex has been on a rising trend and is likely to rise further on 5G rollouts. Customer acquisition costs have risen sharply, despite muted industry net adds. The scope of further margin expansion from lower regulatory levies/access charges appears limited to us. We believe there is a case for sharper tariff hikes in the medium term, given a drag on R-Jio’s return ratios from potentially higher depreciation and interest on recently acquired spectrum.

Network opex likely to increase, customer acquisition costs at alarming levels

Network opex has been on a rising trend for Indian telcos. Bharti and Vi have benefited more than R-Jio from the Ind AS 116 implementation, but even on adjusted basis, R-Jio’s network opex has been higher and is growing faster on a sharp increase in fiber usage charges. Network opex per sub has inched up over the past few years and is now similar for Bharti and R-Jio at ~Rs66/month; we expect the rising trend to continue on 5G rollout costs.

Despite muted industry net adds, customer acquisition costs rose sharply for the industry to ~Rs100 bn (or ~Rs265 per gross sub addition). Although there have been some cuts in dealer commissions in FY2024, we expect customer acquisition-driven SG&A cost increases to continue over the next few years.

Ind AS 116, tariff hikes, IUC change and operating leverage boosted margins 

Indian telcos’ reported FY2019-23 EBITDA margins have increased sharply, led by wireless market repair (tariff hikes), IUC regime change, lower SUC charges, operating leverage benefits and most importantly, Ind AS 116 implementation. After Ind AS 116 implementation, part of the opex (largely tower rentals) is now reported below EBITDA and adjusted for leases, R-Jio/Bharti India’s EBITDA margins at 46%/43% are ~5%/9% lower versus reported margins.

Bharti’s RoCE improved sharply; R-Jio requires tariff hike to maintain RoCE

Driven by wireless tariff hikes, Bharti’s RoCE improved sharply over FY2019-23 to ~8%. R-Jio’s RoCE has remained stable at ~8%-10%, as the capitalization of network opex and depreciation reduced with rising market share/utilization. With ~37% of assets (including spectrum) under development, R-Jio’s annual depreciation and interest could potentially rise ~Rs85-90 bn each over the next few years and could lead to further RoCE/RoE dilution, in the absence of tariff hikes. With pan-India 5G rollouts nearing completion and a potential drag on R-Jio’s return ratios, we believe there is a case for sharper tariff hikes in 2024.

Raise FY2026 EBITDA marginally and FV to Rs1,050 for Bharti; maintain ADD

We raise our FY2026E EBITDA for Bharti by a modest ~2%. Driven by a roll-forward to December 2025 (from September 2025) and marginal EBITDA increase, we raise our FV to Rs1,050 for Bharti (earlier Rs975). Maintain ADD on favorable LT risk-reward. We also raise Indus’ FV to Rs200 (earlier 185) and maintain our ADD rating.

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