The recent Supreme Court judgement that went against the telecom operators on the issue of adjusted gross revenue (AGR) will have huge financial implications on the incumbent telecom operators like Bharti Airtel and Vodafone Idea, and has cast a shadow on the future health of the two companies, if they do not get a relief from the department of telecom (DoT).
India’s incumbent telecom operators, already struggling with huge debt and cut-throat competition that has hit revenues, got a big jolt last week, when the Supreme Court upheld the government’s stand on AGR. The telecom operators had for long argued that AGR should be calculated only on the core telecom services. However, DoT claimed that AGR should also include non-core operations of the companies. The adverse Supreme Court judgement means the telecom companies will have to cough up Rs 92,000 crore, plus spectrum usage charge, penalty and interest, taking the total amount to almost Rs 1.42 lakh crore.
Bharti Airtel said on Tuesday that it has deferred the earnings announcement for the July-September quarter to November 14 seeking more clarity on the AGR issue. The company has already said the Supreme Court 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.
“The company is approaching the DoT to seek clarity on the total amounts involved and request for their support to deal with this adverse outcome,” it said. Until a few years ago, there were 15 small and large telecom players in the market. Hit by an intense tariff war, most had shut shop or merged with peers. Airtel is one of the only three private players now left in market; Reliance Jio and Vodafone Idea being the other two.
The order, therefore, will primarily have a huge impact only on Airtel and Vodafone Idea, already struggling to overcome huge losses. While, Bharti Airtel reported a net loss of Rs 2,866 crore in the April-June quarter, Vodafone Idea’s net loss in the same period stood at Rs 4,874 crore.
Jio will be among the least affected from the Supreme Court verdict, since it rolled out 4G telephony only three years ago.
Last year, Vodafone India and Aditya Birla Group-owned Idea Cellular merged to form the country’s largest telecom company Vodafone Idea Ltd. The company’s total outstanding as of July 5, 2019 as per submission of DoT is at Rs 28,309 crore, including Rs 6,871-crore license fee balance, Rs 13,006 crore interest on balance license fee, penalty of Rs 3,206 crore and interest on penalty at Rs 5,226 crore.
“Clearly, this judgement has significantly damaging implications for India’s telecom industry, which is already reeling under huge financial stress,” Vodafone Idea said.
The company has also said the judgement will have “financial implications,” which the company is “reviewing,” and wants the DoT to consider granting some relief, including waiver of interest and penalties. “The total outstanding amount works out to be Rs 55 per share and Rs 10 per share for Bharti Airtel and Vodafone Idea. This implies a 16 per cent impact for Bharti, but more than the market value for Vodafone Idea. This highlights the risk of survival for Vodafone Idea,” said Aliasgar Shakir, research analyst at Motilal Oswal Financial Services.
On Tuesday, Bharti Airtel shares fell 3.3 per cent to Rs 360.35 and Vodafone Idea was trading 7.6 per cent lower at Rs 3.87.
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The Supreme Court has given three months time to deposit the due amount and report compliance. The companies can now file a review petition to a wider Supreme Court bench, file an appeal to the chief justice of India and appeal to the President. “Given the significant damage from this verdict and the large portion of government debt, we believe that the government will have to step in to rescue the incumbents,” said Shakir.
Ratings agency CRISIL also said that the Supreme Court judgement was “credit negative” for telecom operators. “This could add significantly to the already gargantuan liability of telecom operators towards the government of India,” it said.
The funding mix of this liability in terms of debt and equity will be critical to credit profiles of the operators, CRISIL added.
