How Vodafone Idea will suffer after SC verdict on AGR dues

Vodafone Idea is set to face challenges as India’s Supreme Court has allowed 10 years for making payment of adjusted gross revenue (AGR) dues in installments.
Vodafone Idea BusinessTelecom companies have to pay AGR dues along with interest and penalty which is estimated to be around Rs 1.6 lakh crore.

Bharti Airtel has already paid nearly Rs 18,000 crore against nearly Rs 43,000 crore total AGR dues.

Vodafone Idea has paid only Rs 7,854 crore to DoT against its total AGR dues of around Rs 58,000 crore. Vodafone Idea has already significantly cut its Capex (capital expenditure) in the past quarters.

Tata Teleservices paid Rs 4,197 crore against AGR dues of Rs 16,789 crore. It is not clear weather Airtel will be forced to absorb the payment of Tata Teleservices towards its AGR dues.

There could be liability on Reliance Jio and Bharti Airtel which have taken the spectrum from Reliance Communication, Videocon and Aircel, Rusmik Oza, executive vice president, head of Fundamental Research at Kotak Securities, said.

Vodafone Idea was looking forward for a 20 year payment cycle which has now reduced to 10 years. The annual AGR dues could put further strain on the cash flows of Vodafone Idea considering the high annual interest, depreciation and amortization cost.

The AGR verdict is positive for Bharti Airtel as it has got 10 years to pay the spectrum charges.

Reliance Jio has already cleared its AGR dues. Reliance Jio is India’s #1 telecom operator based on the number of subscribers on its 4G network.

The Supreme Court has asked NCLT to decide whether spectrum held by telcos can be sold under IBC is also seen as positive for Bharti Airtel regarding payment of AGR dues of Aircel and Videocon and also for Reliance Jio for payment of RCom AGR dues, Keshav Lahoti, associate equity analyst at Angel Broking, said.

Assuming 8 percent interest rate, Bharti and Vodafone Idea will have to pay INR39b and INR75b respectively. With zero per cent interest rate, this reduces to INR26b/INR50b respectively, says Hemang Jani, head Equity Strategist, Broking & Distribution, Motilal Oswal Financial Services.

Since the SC has not said anything about the dues of R Com, Aircel and Videocon, this is certainly very positive for Reliance Jio and Bharti Airtel, VK Vijaya Kumar, chief investment strategist at Geojit Financial Services, said.

As per ICRA note, this relatively shorter payment timeframe exerts additional pressure on the cash flows and necessitates sizeable ARPU increase and can have an impact on the industry structure·

Assuming these payment terms are implemented on the balance amount to be paid, the telcos will have to shell out an amount of Rs. 9,000 crore by March 31, 2021 as upfront payment, followed by 10-annual instalments of around Rs. 12,000 crore at 8 percent rate of interest starting February 2022 till February 2031.

“The proposed payment pattern adds to the burden of the industry which was already saddled with elevated debt levels. This will also exert pressure on the cash-flows and leaves limited room for network Capex and expansion,” Ankit Jain, assistant vice president, Corporate Ratings, ICRA, said.

“The government had earlier allowed deferral of the spectrum auction instalments for FY2021 and FY2022. However, this 10-year payment for the AGR dues dampens the relief on auction payments to some extent,” Anupama Arora, vice president and sector head, Corporate Ratings, ICRA, said.

The annual instalments for the auction payments are to the tune of Rs 32,000 crore for the industry starting FY2023, which along with Rs 12,000 crore annual instalment for the AGR dues starting February 2022 will necessitate substantial increase in the ARPUs to more than Rs 350 and has the potential to have a longstanding impact on the industry structure.