Indian telecom industries’ competitive dynamics and the financial health of Bharti Airtel Ltd and Vodafone Idea Ltd will be impacted if the companies are to pay past statutory dues arising out of a Supreme Court ruling, Moody’s Investors Service, said on Monday (December 2).
“If, as we expect, the amount Bharti is ultimately required to pay is large and needs debt funding, the company’s debt leverage will increase, a credit negative,” Moodys said. It also added that potential payment of past due fees weighs on the credit profile of Bharti Airtel Ltd despite spectrum moratorium and price hikes.
The Supreme Court on October 24 upheld the government’s definition of adjusted gross revenue (AGR), which is the basis on which telecom companies license fees and spectrum usage charges are paid. Bharti Airtel, Vodafone Idea and other telcos face as much as ₹1.47 lakh crore in past liabilities following this ruling. Bharti Airtel on November 26 filed a petition with the Supreme Court seeking a modification of the 90-day deadline set by the apex court to pay past statutory dues arising from AGR ruling.
The telecom department defines AGR as all revenue generated by telecommunications companies. The telecom firms said AGR should include only revenue generated by telecommunications services. These companies typically pay the government around 8 per cent of AGR as license fees and 3-5 per cent of AGR as spectrum usage charges. The Supreme Court judgement on October 24 directed that telecoms should clear pending dues of interests and penalties by the end of January 2020 and added that Bharti has recorded an aggregate ₹34,260 crore provision related to these potential liabilities.
“If Bharti and Vodafone are required to make their payments immediately and in full, it will likely have fundamental implications for the financial health and competitive dynamics of the Indian telecommunications industry,” it said.
Without a ruling from the Supreme Court that reduces the amount or extends payment terms, Bharti’s debt level could rise by 25 per cent if it is required to pay the full payment of its aggregate provision and if Bharti funds it entirely with debt.
Moody’s said the increase in tariffs for phone calls and data announced by Bharti, Vodafone Idea and Reliance Jio Ltd “will boost their profitability and cash flow generation because a large portion of the price increase will drop to their bottom lines. Bharti may look to design various price increases across its subscriber base to drive a sustainable increase in average revenue per user (ARPU) from the current amount of ₹128. Loss of subscribers or higher churn rates would offset the benefits of price increases,” it said.
Assuming Bharti’s higher-priced plans result in a 10 per cent increase in its ARPU for its 279 million Indian mobile subscribers, Moody’s estimated that the company would generate an additional USD 500 million of annualized EBITDA (earnings before interest, taxes, depreciation, and amortization). This assumes around 75 per cent of the total price increase drops to the bottom line, as costs will be largely limited to the license fees and spectrum usage charges associated with the additional revenue.
To ease some of the financial burden associated with the low profitability of the sector and high debt levels, the government announced a two-year deferment of scheduled spectrum payments to be spread equally over the remaining installments beginning in March 2023.
Bharti’s annual spectrum payments total around ₹6,000 crore, which translates into around ₹12,000 crore of payment relief over the next two years.