Telcos reeling under revenue blow could do with some kindness

After the SC judgment, as the two incumbents began petitioning the government for relief from such hefty payouts, RJIo began lobbying against any relief, saying the two telcos are well placed to pay the dues. PTI File Photo

There was a time not long ago when the Indian telecom market had nearly a dozen players, rock bottom call tariffs and stiff competition among these numerous operators which kept subscribers happy. Then, Reliance Jio Infocomm entered the market in 2016 and the market dynamic began to change. From a crowded market dominated by voice services and numerous operators, the Indian telecom market has now become virtually a three-horse race (excluding state-owned BSNL). It could soon shrink further and become a duopoly, given the intense stress the two incumbent telecom operators have been put under by the recent Supreme Court decision on huge arrears they owe to the government.

Late last month, the SC ruled in favor of the Department of Telecom (DoT) in a long-standing dispute on the definition of adjusted gross revenues (AGR) of telecom operators. Operators pay license fee and spectrum usage charges based on AGR and the dispute was over inclusion of receipts from non-licensed activities such as dividend, capital gains, etc, besides income from some other items. The SC ruled that DoT’s claims on the definition of AGR as well as on applicability of interest, penalty and interest on penalty were valid. So now, the operators are liable to pay tens of thousands of crores as arrears to DoT and this prospect is haunting their already over-leveraged balance sheets.

Reports suggest that the total payout to DoT could be well over Rs 1 lakh crore and the two incumbent telecom companies, Bharti Airtel and Vodafone Idea Ltd (VIL) may have to shell out a significant portion of this hefty bill. Bharti may just about survive the financial burden from huge new payout but VIL may not.

Analysts at brokerage Motilal Oswal said that Bharti could manage to scrape through with Infratel stake (telecom tower arm) sale. “Bharti has net debt to EBITDA of 3.4 times with net debt of Rs 93,000 crore as of first quarter of FY20. It has a 53% stake in Bharti Infratel which can fetch Rs 25,000 crore and be utilized to repay the DoT payment, including interest and penalty… VIL doesn’t have cash to manage beyond June 2020.”

After the SC judgment, as the two incumbents began petitioning the government for relief from such hefty payouts, RJIo began lobbying against any relief, saying the two telcos are well placed to pay the dues. As the government decides on what to do next, murmurs have begun rising in the market about Vodafone-Idea looking to exit. This would make it a two-horse race. How such rapid market consolidation hurts consumers is already evident — RJIo has already introduced a six paise per minute charge on calls its subscribers make to numbers of other networks, three years after Mukesh Ambani promised life time free voice calls. How tariffs and indeed the bargaining power of the Indian telecom consumer gets reduced will be easy to fathom, if another larger telco were to exit this market.

After the SC judgment, Bharti Airtel said in a statement that telcos have invested “billions of dollars in developing the telecom sector and providing world-class services to consumers. This (SC) decision has come at a time when the sector is facing severe financial stress and may further weaken the viability of the sector as a whole. Of the 15 old operators impacted by the order, only two private sector operators remain in service today. The government must review the impact of this decision and find suitable ways to mitigate the financial burden on the already stressed industry.”

Echoing Bharti’s sentiments, VIL also said that the SC judgment has “significantly damaging implications for India’s telecom industry, which is already reeling under huge financial stress and is left with only four operators. Significant investment of several billion dollars has been made in creating world class networks. Today’s order has huge impact on two private operators while most of the other impacted operators have exited the sector. We urgently request that the government engage on this matter in order to find ways to mitigate the financial stress for the industry.”

Motilal analysts have said that VIL has net debt of Rs 90,000 crore, potential cash of Rs 30,000 crore and this company will require addition capital to fund even the current operations beyond the next 3-4 quarters, leave alone the additional Rs 28,000 crore DOT payout. The analysts have said that VIL could file for bankruptcy — it accounts for just about 30% of the market. VIL has denied reports that it is exiting the business but the strain on its finances is obvious.

So what should the government do now, to prevent a near collapse of the Indian telecom market? Many believe the telecom business has already been jinxed for years — first, the infamous notional loss debate and subsequent cancellation of 122 telecom licenses by the SC stymied the market as several foreign investors decided to exit in 2012. Then the arrival of RJio with deep pockets and unheard-of freebies further skewed the business in favour of one operator. Now, if the government were to insist on upfront payout from the two incumbent telcos in one tranche, the telecom market is sure to be in doldrums.

Instead, it could look at a moratorium. Analysts at brokerage IIFL have suggested the government agrees to staggering the AGR-related license fee payment over 5-7 years and that telcos raise tariffs to offset some of the new financial burden. Analysts have noted that the government should see benefits in ensuring that VIL does not end up in bankruptcy process. Their assessment is that the nearly Rs 90,000 crore spectrum debt of VIL is yielding annual receipts of Rs 12,000 crore to the government and the over Rs 30,000 crore banking system exposure to VIL should also dictate the government’s mood in this case.

Unnamed government officials said the government is mulling a 20-year moratorium on payment of AGR related levies. If it does decide on a long moratorium period and some other concessions, the government would only be acting in self-interest. A dying telecom sector will be of no use to the exchequer, which depends heavily on telcos to meet India’s annual revenue targets.