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SC dismisses AGR liability review petition
* In a big blow to telecom sector, India’s apex court has dismissed the review petition filed by telecom companies to grant a relief on AGR liabilities, which have to be paid before the deadline of 24th Jan’20. We note that telcos owe ~INR920b in AGR dues to the government, primarily Bharti (~INR343b) and VIL (~INR443b).
* The verdict may put a severe burden on telcos and have unconceivable repercussions, particularly against the backdrop of VIL facing a risk of shutdown (it may result in INR1.2t debt default, large-scale job losses and subscriber churn).
* We thus believe that the final outcome may not be linear and that there could be a payment extension or moratorium to say the least. Irrespective of the outcome, Bharti is well prepared and, along with RJio, appears poised for strong market share gains.
Legal options – curative petition
Both Bharti and VIL indicated that they are exploring filing a curative petition in the SC, wherein it has to be proved that the decision would have a humanitarian impact and also severe repercussions on GDP, given the importance of the sector toward digital infrastructure and the economy. That said, we note that historically such petitions have been rarely accepted by the SC. Also, other non-telecom PSU companies have liabilities of over INR3t – the payment for which is still questionable – and they may too file a review petition.
Will government step in?
It won’t be surprising if the government comes to the rescue of the telecom sector. This is particularly because it has to recover INR900b as deferred spectrum debt from VIL, which has stated it will shut operations if asked to pay the entire AGR liability. Also, VIL owes INR300b to banks (against this, Aditya Birla Group and Vodafone Plc’s stake in VIL stands at a mere INR70b and INR80b, respectively). Moreover, the implication on end-customer in the advent of VIL shutdown could be terrible. In such a scenario, we believe that the government may look to exercise other options, including:
* It may provide an AGR liability extension or moratorium on the same lines as spectrum payment liability to resolve near-term cash flow issues.
* The DoT could consider waiving off penalties and interest on penalties before 2011 (as first decision of the SC on AGR liability came in 2011). In that case, ~40% of AGR payments could go off. This, however, will be in contrast to its statement in the parliament that it will not provide any relief toward AGR liability.
* GST input credit of INR80b/INR90b for Bharti/VIL is also being explored, but it could be a long-drawn process given the need for the GST Council’s nod.
* The TRAI/DoT are deliberating a reduction in the license and spectrum usage charge (SUC), which could offer another INR30-40b each for Bharti and VIL.
Instead of a single mega relief package, measures could be announced in tranches, in our view.
VIL – Government intervention or shutdown?
Mr Kumar Birla earlier mentioned that VIL would shut operations if asked to pay the entire AGR liability of INR443b. The company has no source of cash to pay the liabilities and was entirely dependent on payment relief. It has cash merely to continue operations for the next 2-3 quarters. Taking the AGR liability aside, our workings indicate VIL (post recent price hike) has a deficit of INR40-50b to cover cash interest and capex from operating cash flow. In such an event, we believe that VIL would require another round of price hike of ~36% in FY21 to reach an ARPU of INR186, along with more relief measures from the government to bridge the cash flows deficits
Bharti – ready with Plan B
Bharti Airtel has sought relief on AGR liability but also prepared itself with a plan-B by raising ~INR210b during the past week by way of QIP (~INR140b) and FCCB (INR70b). The rest ~INR130b could be funded by bank loans. Bharti’s present net debt stands at INR890b with EBITDA of INR400b in FY21 (net debt to EBITDA of 2.2x). So, incremental INR130b would still keep net debt manageable at INR1,020b with 2.6x net debt to EBITDA.
Bharti, RJio – eying duopoly market
Given the adverse situation for VIL, RJio and Bharti could gain disproportionately. Thus, irrespective of an adverse ruling, Bharti has best hedged position even if it is required to pay the AGR liability. Assuming subscriber share of 70:30 for RJio/Bharti, both telcos could see EBITDA addition of INR100b/240b with 70% margin, implying a jump of 25%/55%.
Bharti – strong FCF could be a reality
Bharti has the potential to garner FCF yield of 5%, factoring in (a) the recent price hike, (b) reducing capex from the FY19 peak and (c) lower interest cost due to the recent deleveraging. This should allow it to further reduce its debt. Its competitive position in the market also remains intact with 30% revenue market share and healthy 4G subscriber adds. Thus, even in a no tariff hike environment, it could continue driving gradual ARPU-led EBITDA growth through a mix improvement.
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