India’s telecom landscape is in the midst of a never-before churn, but it would be a fallacy to believe that the goings on will impact only telecom operators. The government and India’s already weak state-run banks will also have to bear the consequences of the sudden and huge liability imposed by the Supreme Court in asking telcos to cough up nearly ₹1.5 lakh crore in past dues in a short period of time.
If even one large telco folds up due to its inability to meet this sudden demand, the government could lose a large chunk of revenue. State-run banks are already scared of the consequences of the adjusted gross revenue (AGR) demand due to their huge exposure to the sector. And as for subscribers, they have already been hit by a significant tariff hike in the December quarter and tariffs could go up further if the sector is to survive.
Do or die situation
Indian subscribers have long been paying the least for voice and data services anywhere in the world as telcos focused more on subscriber acquisition than in chasing profitability. But now, an internecine war among operators, exacerbated by the entry of Reliance Jio Infocomm (RJio) three years back, and disastrous government policies have already lead to a steep hike in tariffs. And as the deadline to pay AGR dues approaches, two of the biggest Indian telecom operators are faced with a do-or-die situation.
Bharti Airtel and Vodafone Limited Idea Limited (VIL) have to together pay nearly ₹70,000-₹80,000 crore by Wednesday (January 22) as AGR dues, as per the SC order. The apex court has already dismissed the telcos’ review petition and the government seems disinclined till now to offer a relief. It is no wonder that in such a trying situation, analysts have already called this a two-horse race between incumbent Bharti Airtel and RJio. The third operator, Vodafone Idea, is seen to be in too weak a position financially to survive, though media reports suggest it will offer a token amount to the government by the January 23 deadline to remain in business.
How banks will be affected
Brokerage ICICI Institutional Equities said in a note that Bharti Airtel has raised capital of $3 billion, which should help it meet its AGR liability with the help of additional debt. But what about banks and how would a government critically short on revenue manage the fisc if the money due from VIL were to not come at all in the event of a shutdown?
“VIL promoters, Vodafone Plc and Aditya Birla Group, have already mentioned that if the entire AGR liability has to be paid, they will have to shut shop. We don’t see the situation for VIL being salvaged without government intervention. Apart from other stakeholders in VIL, the government too could be one of the most impacted parties if the company shuts down as it is owed ₹900 billion (₹90,000 crore) in deferred spectrum dues, besides the AGR liability. We also see indirect impact on PSU banks if VIL fails to cough up the money,” analysts at ICICI said.
According to brokerage Elara Securities, the dues the government expects Bharti and VIL to pay could account for a little over 0.4 per cent of India’s GDP. “Following Supreme Court’s dismissal of review petition on its October 24th ruling (where it mandated the telecom companies to pay license fee dues by January 23), as many as 15 telecom companies would have to pay dues totalling to ₹1.47 trillion (₹1,47,000 crore). Media reports suggest that the telecom companies may file for curative petition and/or ask for additional time from the government to pay up the dues. It is also likely that the government may offer some respite to telecom companies by offering option for staggered payment. In absence of clarity regarding the same, for our FY20 estimates we have assumed ₹250 billion (₹25,000 crore) as the revenue for the government from AGR. The AGR dues worth ₹860 billion (₹86,000 crore) owed by Bharti Airtel and Vodafone India are equivalent to 0.42 per cent of GDP.”
So will the government offer relief to the beleaguered telecom companies? It has already allowed a moratorium on spectrum payment for two years. Such concessions are welcome but nowhere near enough to prevent a consolidation of the telecom sector and possible exit of VIL.
Why Reliance has an edge over the rest?
A recent article in CNBC quoted unnamed sources to say that now even the Reserve Bank of India has sought relief for telcos from the government, alarmed as it is by the prospect of state run banks reporting more bad loans due to their exposure to the telecom sector.
So how bad are things for the three main telecom operators – Bharti Airtel, Vodafone Idea and RJio? Analysts at brokerage Motilal Oswal have said in a note that RJio is the best placed right now. With monthly gross subscriber addition of 8 million and incremental mobile broadband subscriber addition of over 45 per cent, “RJio is cruising towards a more than 40 per cent revenue market share (currently at 35 per cent). The sharp reduction in capex intensity and capital reorganisation has also helped RJio create a lean balance sheet with net debt to EBITDA of 5x in FY21E. The Supreme Court verdict on AGR liability too has created a favourable situation for RJio with no impact and the possibility of potential market share gains from VIL.” In short, while the AGR liability is a huge overhang for Bharti and Voda, it brings no pain but actual gains for RJio. The analysts have said that the recent tariff hikes and consequent increase in ARPU (average revenue per user) of 27 per cent could also increase RJio’s free cash flow by an incremental ₹9,700 crore.
Worst hit due to the AGR fiasco is VIL. Had it not increased tariffs in December alongside the others, this company would have been left with “hardly any cash” to support itself over the next two to three quarters. But the tariff hike is still insufficient to fund the annual capex and cash interest requirement of ₹1,600 crore. Also, VIL continues to face survival risk in the event of no relief on its AGR liability of over ₹44,000 crore.