AGR liabilities case: SC deliberating on payment timelines
* The Supreme Court (SC) in its hearing today took cognizance of central government and telcos’ plea that if no staggered payment option was given, some telcos would have to shut shop. Moreover, with insufficient porting capacity, consumers could face severe problems, with banks potentially suffering major NPAs.
* The SC has now asked DoT/telcos to submit the roadmaps of payment, timelines to be allowed, and securities for the AGR liability by the next hearing on 18th June’20.
* A 20-year grant would result in cash outgo of INR27b/INR52b for BHARTI/VIL, and VIL would need a ~50% ARPU hike to service its obligations. However, lower payment tenure may put pressure on VIL’s cashflows.
* A similar tariff hike by BHARTI/RJio would result in incremental EBITDA of INR211b/INR280b, implying a 45%/63% increase in EBITDA over our current estimates in FY22E.
* Maintain our bullish stance on BHARTI, with TP of INR710 on SOTP; maintain RJio at INR885/share post its debt reduction plans and ongoing series of funding from global investors.
SC takes note of telecom woes, but seeks roadmap on AGR payment
The SC, after dismissing the self-assessment pleas of AGR liabilities in earlier hearings, took cognizance today of the central government and telcos’ plea that if no staggered payment option was given, some telcos would have to close down. Moreover, with insufficient porting capacity, consumers could face severe problems, with banks potentially suffering major NPAs. The SC has now asked DoT/telcos to prepare a clear roadmap for payments and timelines and securities/guarantees that could be provided for the AGR dues. On the DoT option to consider payments over a 20-year period, the court countered that 20 years into the future remains quite unpredictable and may or may not be assumed reasonable. It further asked what securities / bank guarantees could be provided over the timelines proposed. The subsequent hearing is scheduled to take place on 18th June’20. BHARTI and VIL have put forward that their telecom licenses may be revoked by DoT in case they default on their timelines; VIL has clearly mentioned that it does not have the capacity to provide bank guarantees of ~INR500b.
Price hikes inevitable
VIL needs ~50% ARPU hike to support cashflow
In the event that the apex court grants a 20-year staggered option plan to the incumbents to pay their AGR dues, maintaining the NPV of the balance AGR dues at an 8% interest rate, this would result in cash outgo of INR27b/INR52b per annum for BHARTI/VIL over a 20-year period (refer to Exhibits 1, 2). Considering VIL’s liquidity constraints, it needs a ~50% ARPU increase to achieve EBITDA of INR300b by FY22E. This is to bridge the gap of INR128b EBITDA in FY22 against cash requirement of (refer to Exhibit 3): a) INR165b in deferred spectrum liabilities, b) INR52b in annual AGR payment, c) INR30b in cash interest cost to lenders, and d) capex of ~INR52b. This is assuming there is no further subscriber churn, which also seems unlikely given the weak network capability and negative consumer sentiment.
BHARTI and RJio could see benefit
A similar tariff hike by BHARTI/RJio would result in incremental EBITDA of INR211b/INR280b, implying a 45%/63% increase in EBITDA over our current estimates in FY22E (refer to Exhibit 4). Given both BHARTI and RJio’s better cashflow positions, the companies could see strong benefit from the potential tariff hikes. Thus, we believe the possibility of the next phase of tariff hikes seems quite evitable on the premise that:
a) VIL needs to survive, and India cannot be a two-player telecom market, as it would result in an extended effect on other sectors such as Banking, telecom vendors, technology partners, and others.
b) The balance sheets of telecom operators have been leveraged and ARPUs depressed since RJio’s entry into the Telecom space.
c) The system now recognizes the strategic significance of telecom operators post the COVID-19 crisis, and the need for high-quality networks and telecom infrastructure in the country’s drive to maximize digital usage in every field.
d) Marquee global technology giants, PE investors, and sovereign funds are confident of the Indian Technology-Telecom sector. This can be observed from ~INR1t in inflows into RJio and further news of Amazon, Inc. & Alphabet, Inc. eyeing stake in Bharti Airtel and VIL, respectively.
Furthermore, if the SC grants a payment period of 15 years, as per our estimates, the annual outgo of BHARTI/VIL would stand at INR30b/INR60b (refer to Exhibit 5). Moreover, if the granted period stands at a mere 10 years, the annual outgo would be INR39b/INR77b for BHARTI/VIL (refer to Exhibit 6). Subsequently, the corresponding tariff hikes requirement would increase with a fall in repayment tenure.
Bullish on BHARTI, RJio
We maintain our bullish stance on BHARTI, with TP of INR710 on SOTP, assigning 12x on FY22E India Wireless EBITDA and 6x on Africa. On the other hand, we assign TP of INR885/share for RJio, assigning 13x on FY22E EBITDA post its debt reduction plans and ongoing series of funding from global investors. We have forecast FY22E ARPUs of INR185/INR148 for BHARTI/RJio and are yet to build in material tariff hikes up to FY22, thus providing an incremental upside on EBITDA.
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