The government's decision to convert Vodafone Idea's statutory liabilities into equity and deploy substantial financial support for BSNL and MTNL, as outlined in the Union Budget 2025, are expected to have a far-reaching impact on the telecom sector in FY26.
Analysts at India Ratings and Research (Ind-Ra) expect these moves to influence competitive dynamics, market share shifts, ARPU trends and the recovery of return ratios over the next two to three years.
Spectrum instalments from October 2025 to March 2026 and AGR instalments due in March 2026 for Vodafone Idea amount to approximately $3.3 billion (Rs 272 billion).
The telco must also provide bank guarantees of $3 billion (Rs 247 billion) to the government for annual spectrum instalments due by September 2026, as per the Ind-Ra presentation, which cited information from Vi con call and quarterly reports.
In February 2023, the Indian government converted Vodafone Idea's interest dues, amounting to $1.96 billion) into equity. This conversion resulted in the government becoming the single-largest shareholder in the company, with a 33.14 percent stake. The stake in the company came down to 23.8 percent after the successful follow-on public offer (FPO) in April 2024. Vodafone Group and the Aditya Birla Group hold 22.56 percent and 14.76 percent stakes in Vi.
Ind-Ra has a “neutral” outlook for the telecom industry for FY26, saying the pivotal policy decisions will determine the sector’s trajectory. The agency forecasts a 6-10 percent year-on-year rise in industry-wide tariffs in FY26, driven by the base effect of recent hikes and an organic tariff growth of 3-5 percent from changes in the user mix.
“ROCE recovery will be the most critical consideration in regulatory and corporate decisions in FY26,” said Ind-Ra Associate Director Priyanka Bansal, referring to return on capital employed. For public sector undertakings, government support is expected to become increasingly need-based and aimed at enhancing structural competitiveness and operational efficiencies.
For private operators, tariff hikes are deemed essential to recover 5G-related capital expenditures and improve ROCE. However, achieving higher returns remains challenging, as ARPUs must increase by 25-35 percent (Rs 60-70) from Q2FY25 to reach a 15 percent ROCE, Bansal said.
Industry challenges
Ind-Ra highlighted a deteriorating outlook for the telecom tower sector in FY26. Benefits from 5G-related capital expenditures have yet to materialise, while prolonged dependence on government support, overdue receivables, and partial conversion of dues into equity for Vodafone Idea continue to strain liquidity.
“Despite timely payments since December 2023, overdue payments remain significant. Additionally, the conversion of dues into equity is credit negative,” the agency said.
Broadband a key growth opportunity
Broadband presents a promising $6-7 billion market for telecom operators, with India’s home broadband penetration at only 16 percent, up from 8 percent in FY20 but still lagging other developing nations.
“India’s 280 million total households and 180 million cable-TV households offer significant potential. Telcos are already targeting this market by expanding their presence in non-mobility services like broadband and fibre-to-the-home (FTTH),” the agency said.
Challenges such as last-mile connectivity issues, high deployment costs (underground cabling is 8-10x costlier than aerial cables) and competition from local cable operators hinder FTTH growth.
Broadband subscription ARPU is two-three times higher than mobility services, giving telcos an opportunity to bundle additional revenue-generating offerings with a payback period of approximately 43 months. The agency also highlighted 5G fixed wireless access (FWA) as a potential solution to many challenges faced by the FTTH segment, with telcos increasingly focusing on FWA as a broadband alternative.
Ind-Ra anticipates a slowdown in capital expenditure momentum for Airtel and Reliance Jio in FY26, following the completion of 5G-related investments and spectrum auctions.
In its Telecom Outlook FY26 presentation, Ind-Ra emphasised the need for strategic decision-making to navigate these challenges and opportunities, as the industry prepares for a transformative phase.
(Disclosure: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.)
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