Several research reports indicate that the supreme court judgment on AGR case will not impact Bharti Airtel and may hurt the business of Vodafone Idea.
Bharti Airtel and Vodafone Idea may explore legal options such as appealing to Supreme Court bench or Chief justice of India provided the judgement is not unanimous.
The industry is hoping India government could change the definition of AGR retrospectively in license condition to exclude non-telecom revenues. When government lost tax case with Vodafone, it did change the law retrospectively.
Airtel is liable to pay Rs 217 billion, while Vodafone Idea needs to pay Rs 283 billion showing that the verdict will be a massive body blow to Bharti Airtel and Vodafone Idea.
These liabilities pertain only to underpaid license fee and associated penalty and interest. “Related demand on underpaid spectrum usage charges is also quite likely – this demand could be 60-70 percent of the license fee related demand,” said Rohit Chordia and Aniket Sethi at Kotak Securities.
Operators pay license fee and spectrum usage charges (SUC) on AGR and the dispute pertained to inclusion / exclusion of receipts from non-licensed activities (items like treasury income, dividend, capital gains, scrap sales, forex income, etc.) and certain other items (bad debt recovery, trade/consumer discounts, rental income on infra sharing).
Airtel
Bharti Airtel’s balance sheet is relatively better. While the payouts will increase the leverage ratios, the situation is far more manageable for Bharti Airtel, Kotak Securities said.
Airtel’s pay-out to government for AGR liability reduces its capability to compete aggressively with Jio, Dolat Capital said.
“Bharti could manage to scrape through with Infratel stake sale: Bharti has net debt to EBITDA of 3.4x, with net debt of INR930b as of 1QFY20. It has a 53 percent stake in Bharti Infratel which can fetch INR250b and be utilized to repay the DOT payment, including interest and penalty,” Motilal Oswal Institutional Equities said.
Vodafone Idea
The development places Vodafone Idea in a very tricky spot given the massive stress it is already under.
The company may need to resort to another large equity raise round to fund these payouts. This may not be easy, given that the amounts we are talking about are a multiple of the company’s current market capitalization.
Vodafone Idea with limited resources would need to fight the Jio and Airtel to improve its performance. To start-off, scaling down operations with partial/full-exit in few of the circles (6-8 maybe) could be a possibility to bring down the cash losses, Dolat Capital Analyst Himanshu Shah said.
Vodafone Idea doesn’t have the cash to fund itself beyond June 2020. Vodafone Idea has net debt of INR 900 billion with gross debt of INR 1200 billion and potential cash of INR 300 billion. It has cash balance of INR 210 billion and can raise INR 50 billion from its stake sale in Indus and INR 45 billion from the next four quarters of EBITDA.
Against this cash, Vodafone has estimated cash outflow of INR 280 billion with an estimated Capex of INR 150 billion, INR 100 billion of debt repayment and INR 30 billion of interest cost, Motilal Oswal Institutional Equities said.
