Telcos go big on rural markets to fuel ARPU, returns

Telecom

India’s telecom operators are doubling down on rural expansion to tap an underpenetrated market, which is becoming central to their growth strategy.

As mobile data demand surges beyond metros, rural subscribers are expected to contribute significantly to a rise in average revenue per user (ARPU) and boost industry returns, ratings agency Crisil said in a note on May 13.

“Relatively lower internet penetration in rural regions will drive migration of subscribers to data plans,” Crisil Ratings director Anand Kulkarni said.

Up-trading of plans due to higher data consumption will also drive ARPU growth. “Here as well, rural areas will play a key role as mobile phones serve as the primary gateway vis-à-vis metro users, who have alternatives such as wi-fi,” he said.

Crisil said that telcos’ network expansion in rural and semi-urban areas will continue to drive ARPU growth in the coming quarters.

The network and spectrum investments and the ARPU growth will help increase telcos’ return on capital employed to around 12 percent this fiscal from 10 percent in FY25, it said.

Industry-wide ARPU, a key performance indicator, is projected to rise by Rs 20–25, reaching Rs 225-230 by the end of FY26, assuming tariff levels hold.

Crisil estimates that 55–60 percent of the incremental ARPU will stem from rural users.

Rural data usage is gaining momentum, aided by broader network reach, cost-effective plans and more affordable smartphones, Crisil said.

Circles B and C, which together account for nearly 70 percent of India’s rural subscriber base, are seeing the strongest momentum.

Data consumption in these zones has grown at a compound annual growth rate of 19–22 percent over the past four years, surpassing the 17–19 percent growth in metros.

“This growth trend should sustain with the expansion of the 4G networks in the underpenetrated areas and will drive up the ARPU, going forward,” Crisil said.

From 2020 to 2024, internet penetration in rural India surged from 59 percent to 78 percent, outpacing urban growth, which moved from 77 percent to 90 percent.

Rural penetration is expected to rise another 4–5 percent by the end of FY26, supported by the growing use of digital communication, social media, streaming platforms, e-commerce, and digital payments.

Despite the mid-2024 tariff hikes, rural data users remained resilient, underlining their high dependence on mobile internet despite greater price sensitivity.

Telcos have responded by customising offerings with more data-centric plans while ramping up investment in rural infrastructure.

During the spectrum auction in June 2024, most purchases were made in B and C circles. In addition, tower companies plan to channel Rs 8,000–9,000 crore in FY26 towards network expansion in rural areas.

“With around 75 percent of the cost being fixed in nature, even a modest hike in ARPU can materially benefit earnings,” said Mohini Chatterjee, Team Leader, Crisil Ratings. The affordability of data plans will remain essential for the growth in rural data subscribers, she said.