Published on 14/10/2020 12:21:58 PM | Source: Emkay Global Financial Services Ltd

Telecom Sector Update - Betting on Bharti while VIL`s outlook remain uncertain By Emkay Global

Posted in Broking Firm Views - Sector Report| #Telecom Sector #Emkay Global Financial Services Ltd. #Sector Report

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Betting on Bharti while VIL’s outlook remain uncertain

* Supreme Court verdict: The Supreme Court has allowed telecom operators to stagger their AGR dues over a period of 10 years, which is lower than the expectation of 15 years asked by Bharti and VIL. In addition, the court ruled that the amount that is due to be staggered shall incur an interest rate of 8% per annum.

* As per the ruling, the telecom operators should also make an upfront payment of 10% of the total liabilities by FY21-end. Since Bharti and VIL have already paid 38% (after accounting for Videocon penalty to be paid) and 13% of their total liabilities, respectively, this condition has already been satisfied, as per our interpretation. However, if this 10% upfront payment is on the outstanding balance amount, we foresee additional cash burden for the companies in FY21. Note that we have accounted for the amount pertaining to Videocon in our total penalty amount calculations for Bharti.

* Although there are legal options available like a curative petition on the Oct’19 order and a review petition on yesterday’s order, we would wait and watch how telcos will react to the final judgment.

* Gap funding to meet AGR and other dues: As per our calculations based on the provisioned amounts, Bharti and VIL will face annual payouts of Rs50bn and Rs93bn, respectively, from FY22. Further, the payments for deferred spectrum payment liability − which stand at Rs75.9bn for Bharti and Rs168bn for VIL − would also start from FY23. Based on our calculations (after accounting for the tariff hike), VIL should see a cash burn of Rs219bn over FY21-23E, while Bharti should register a cash generation of Rs373bn over the same period. In our view, even after a tariff hike, an equity infusion by promoters or a strategic investor, along with any potential surrender of unused spectrum to reduce future liability, seems to be the only solution to ensure VIL’s survival. It could be challenging for VIL to obtain strategic investor due to continued market share erosion and sustained cash losses. We see serious survival issues for VIL even if it gets an equity infusion to offset the cash burn over FY21-23E, as for FY24, VIL will have an annual cash requirement of more than Rs320bn towards government dues and capex funding.

* Tariff hike and ARPU accretion: We have already assumed tariff hike (+20%) in FY21 and ARPU increase of 33% and 49% for Bharti and VIL, respectively, over Q1FY21- Q4FY23. The conversion of the tariff hike to revenue growth is vital and Bharti has delivered a strong conversion rate on previous hike while VIL has lagged the same. To fund AGR penalty and cash losses, VIL requires a higher tariff hikes, which we believe would happen over a period of time. It is important to note that voice subscribers make up 47% of Bharti’s total subscriber base and 52% of VIL. Hence, we believe that a price hike of more than 25% over a span of 12 months could lead to accelerated SIM consolidation.  With network quality continuing to play a crucial role in subscriber churn, any restriction on capex with a view to control the cash outgo would lead to an adverse impact on VIL’s already shrinking subscriber base.

* Bharti remains our top pick: Better subscriber mix, market share gain in the postpaid segment, clear flow-through of tariff hikes and a strengthening balance sheet are some of the reasons for choosing Bharti as our top pick in the sector.  Outlook: The final order not only provides clarity on the payment schedule on AGR penalty but also paves the way for tariff hikes to fund the incremental cash outgo. It also clears the path for potential fund raising for VIL, as without it the company’s survival remains uncertain. In our view, VIL has become a special situation stock with a lack of clarity on survival, leading us to downgrade it to Sell with a revised TP of Rs6. BHIN’s Sell rating is predicated on a lack of visibility on VIL’s survival and the potential risk of downward revision of rentals and zero energy EBITDA.


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