The Indian telecom services industry has started witnessing tailwinds led by the relief package announced by the government, which was followed by the tariff hikes announced by the telcos, and consequently, ICRA has revised its outlook on the telecom services industry to ‘stable’ from ‘negative’.The latest round of tariff hikes, in which the telcos increased the tariffs by around 20 percent across the plans for the prepaid segment, have the potential to expand the EBITDA of the telecom operators by around 28-30 percent for FY2023 and is likely to result in an increase in cash flow generation.The average revenue per user (ARPU) for the industry (excl. BSNL) is likely to improve to around Rs. 170 by the end of FY2023. ICRA expects the industry revenues to grow by 18-20 percent in FY2023, followed by a growth of 10-12 percent in FY2024, which given the high operating leverage, is likely to translate in healthy expansion in operating profits, the same are projected to grow by around 30 percent in FY2023. These are likely to translate into a ROCE of around 8-10 percent for FY2023 for the industry.Also Read: Trai mandates telcos to provide pre-paid mobile recharge plans with 30-day validityMoreover, the recently announced PLI scheme will provide financial incentives to promote the manufacturing of telecom and networking products in India. This scheme is estimated to lead to sizeable domestic production as well as lead to export of these products to other geographies. In addition, this scheme is designed to attract sizeable investments and generate huge direct and indirect employment.In the past, the industry went through a turbulent phase with intense competition leading to pressures on revenues and profitability, and ballooning debt levels, which was exacerbated by the Supreme Court verdict on the Adjusted Gross Revenues (AGR). Intense competition resulted in one of the steepest falls in the industry ARPU, translating into a decline in industry AGR.The green shoots of recovery started when the industry implemented steep tariff hikes effective December 2019, the first of its kind in a long time, which pointed towards the restoration of pricing power to telcos and improvement in cash flow generation. This coupled with consistent upgradation of subscribers to 4G from 2G resulted in a steady improvement in ARPU levels.While these green shoots were sprouting, the tailwinds started in the last 3-4 months when the industry witnessed some structural changes, which include a series of reforms and relief measures offered by the government accompanied by a round of tariff hikes.Under the relief package, the government provided a moratorium on the AGR and spectrum auction dues for four years. As per ICRA estimates, this moratorium provides an annual cash flow breather of around Rs 40,000 crore for the industry till FY2025. Further, the Department of Telecom (DoT) has released a sizeable quantum of bank guarantees (BG) of the telcos towards license fee and spectrum usage charges, after the government slashed the BG requirement by 80 percent under the relief package, which will improve the financial flexibility of the telecom operators going forward.Other noteworthy reforms include rationalisation of definition of AGR to exclude non-core revenues, removal of spectrum usage charges (SUC) for future spectrum auctions and discontinuation of BG requirement for deferred payments of future auctions and increase in tenure of frequency allocation for future spectrum auctions to 30 years.Even after these reforms, the industry demands reduction of levies particularly license fee, which is 8 percent of the AGR. Of this, 5 percent goes towards Universal Service Obligation Fund (USOF), while the balance 3 percent is retained by the government. As on date, around Rs 60,000 crore is lying unutilised in the USOF and thus, industry demands reduction of the proportion which goes towards this fund.These reforms and relief pave way for improvement in the health of the telecom sector. While the moratorium on dues would impact non-tax receipts of the government from telecom sector, two of the telcos have pre-paid their dues towards earlier spectrum auctions totaling to Rs 26,300 crore thereby making up for the loss to the government for the current fiscal.For FY2022, the telecom sector is expected to contribute to around Rs 54,000 crore to government’s non tax receipts, which is in line with the budgeted estimate for the fiscal. For FY2023, ICRA estimates the receipts to be around Rs 30,000 crore, which will be lowest in the last few years.The elevated debt levels continue to remain the Achilles’ heel of the industry which are expected to increase to around Rs 4.7 lakh crore as on March 31, 2022, primarily on account of addition of the spectrum liabilities arising out of the March 2021 auctions. Thereafter, the debt levels are expected to moderate to Rs. 4.5 lakh crore as on March 31, 2023.Telcos have been focusing on deleveraging and Bharti Airtel Limited recently concluded its rights issue of Rs 21,000 crore and collected 25 percent as upfront payment, while Vodafone Idea is also scouting for a fundraiser. ICRA expects the debt metrics to improve as reflected by debt/OPBDITA of 3.4 times and interest coverage of 3.5 times as on March 31, 2023.The cash flow breather from the relief package (especially moratorium) and additional cash flow generation from the tariff hikes will provide headroom for technology upgradation to 5G. It is estimated that the industry would be required to invest around Rs 1.5-1.7 lakh crore over a period of 2-3 years for 5G, including spectrum purchases.Also Read | Budget 2022: Telecom infra companies seek policy, administrative support from FM Nirmala Sitharaman5G would require a denser network of towers as well as healthy fiber penetration. While technology upgradation is imminent, the industry is in the process of a transformation from being a plain vanilla voice and data service provider to more of a technology and content-driven industry. Non-telecom businesses viz. enterprise business, cloud services, digital services and fixed broadband services would play a crucial role in the digital transformation, which will facilitate the growth of the sector going forward.The author Sabyasachi Majumdar is Group Head and Senior Vice President and Ankit Jain is Assistant Vice President and Sector Head at ICRA Limited. Views expressed are personal.