AGR verdict: VIL survival still an uphill task...
The Supreme Court verdict on AGR allowing 10 years staggered payment and clarifying on spectrum trading/sharing liabilities, possibly marks the end of a long drawn legal tangle. For the sector, as a whole, the issues now shift to tariff hike, which will be the key determinant to the path of improvement in cash flow generation, return ratio and survival in case of Vodafone Idea (VIL). For Bharti Airtel (assuming it also has to pay Videocon’s dues), annuity payment of | 4638 crore from FY22 end onwards, will not be a major issue. However, VIL which has already been plagued by cash burns will find it difficult to meet the demand of annuity payment of | 8391 crore from FY22 end onwards. Apart from tariff hike (to the tune of ~92%), it would also need immediate capital infusion to bridge the cash gap. The judgement requires 10% of “total dues” to be paid before March 31, 2021 and remaining in 10 equal instalments. We assume that since both VIL and Bharti have already paid more than 10% of dues, payout should begin from FY22 end.
VIL now needs immediate substantial fund raise, tariff hike
VIL already has FY21 annualised cash gap of ~| 6000 crore (based on Q1FY21 annualised EBITDA and external debt interest & capex needs). From FY23 onwards, it would have to resume spectrum payment outflows (currently on moratorium) of ~| 16000 crore and the AGR annuity of | 8391 crore. Even assuming | 4000 crore of cost rationalisation based savings, there would a cash gap of ~| 26500 crore, assuming subscriber base stays constant. A back of the envelope calculation suggests the required tariff hike to just bridge the annual cash gap would be staggering ~92% from current levels. (Exhibit 3). We expect VIL’s payout ability (as well as going concern promise) to be a near impossible feat unless there is an immediate fund infusion (already scheduled a board meet for the same) and a tariff hike coupled with customer churn arrest. Interestingly, a substantial tariff hike, in our view, will be necessity to attract fund infusion from external investors.
Airtel to be comfortably placed
The ramifications for Airtel will be additional dues of Videocon of | 1376 crore, as the judgment clearly states that “where the entire spectrum is under sale, in that case, the past dues of the seller shall be the liability of the buyer”. On the positive side, the company would not have liabilities for spectrum sharing or in case of Aircel where spectrum trading was done only for a part of spectrum holdings. We expect Airtel to easily meet the cash outflows of | 4638 crore given the current liquidity, comfortable cash generation trajectory and regular ARPU increase on 4G conversions. Nonetheless, the tariff hike, as per our understanding, is now a matter of “when and how much” and not “if” for Airtel, as well as other incumbents.
Valuation & Outlook
On the positive side, the legal tangles seem be over. We expect the industry, as a whole, to utilise their management bandwidth to expand profitability and cash generation. Airtel, with comfortable leverage, superior customer quality and consistent KPI is our top pick. We maintain BUY on Airtel with an unchanged target price of | 700/share. We also maintain SELL on VIL with an unchanged target price of | 6/share, given the difficult path ahead to assure survival and lack of clarity on the same. We also downgrade Bharti Infratel to REDUCE (from HOLD earlier) with a target price of | 180/share. The key risk for Infratel is on tenancy growth concerns and possibly in worst case, Vodafone Idea’s survival (as it is an anchor tenant).
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