Published on 13/07/2020 12:21:31 PM | Source: ICICI Securities Ltd

Telecom Sector Update - Does VIL havecash to deposit as directed by SC? By ICICI Securities

Posted in Broking Firm Views - Sector Report| #Telecom Sector #Sector Report #ICICI Securities

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Does VIL havecash to deposit as directed by SC?

The Supreme Court (SC)has been accommodative of VIL’s inability to offer any guarantee for its payment of AGR dues and has directed telcos to submit past 10 years’ balance sheet, income tax returnsand AGR deposited It has also asked telcos to deposit ‘reasonable’amount. Bharti Airtel (Bharti) and TataTelehave deposited 41% and 25% of DoT demand,and VIL has done only 12%. VIL can source fundsfrom Vodafone Plc’s unpaid indemnity of Rs67bnand can receive Rs36bn for its Indus stake on merger between Bharti Infratel and Indus. We expect VIL to deposit Rs10bn-20bn,which in our view would satisfythe SC since the company’s balance sheet position would justify it as ‘reasonable’payment.

* No additional guarantee a positive.Telecom operators haverequested the apex court to allow them to make payment over next 20 years and have offered no additional guarantees such as back guarantees, personal directors’guarantee,etc. VIL has said it would not be able to offer any guarantee as it has failed to earn profits in last several quarters. In an earlier hearing, VILoffereditslicense and spectrum as guarantees against its AGR dues of Rs514bn.

* SChas asked to make ‘reasonable’payment to prove bonafides.The SC has asked telecom operators to submit past 10 years’ (including FY20) balance sheet, income tax returns and AGR deposited. It has also directed themto make payment of ‘reasonable’amount before the next hearing to provetheirbonafides. The next hearing has been listed for thethird week of July.

* Reasonable amount not defined, but minimal payment should satisfySC.The apex courthas not defined ‘reasonable’amount.However,considering that it has asked telcos to submit their balance sheet, VIL’s inability to make large payment should get well established. Therefore, even a depositof Rs10bn-20bn should come across as ‘reasonable’, in our view. VIL has consistently deposited its AGR dues in the past, which should also lend credibility. Bhartihas already made a large payment of Rs180bn(41% of DOT demand)and Tata Tele Rs42bn(25% of DOT demand)vsRs69bn (11.8%)by VIL. We don’t foresee additional payment by Bharti orTata Tele.

* Source of fundsfor VIL.VIL should not have any material cash in its balance sheet and we don’t foresee any bank lending to itat this juncture. However, we do see two potential opportunities for VIL to source funds:1) Vodafone Plc –has contingent liability indemnity of Rs84bn,of which ~Rs17bn has already been paid. Vodafone Plc can make an additional payment of Rs67bn to which its shareholdersshould not have much objection; and 2) completion of the proposed merger between Bharti Infratel and Indus should aid VIL to garner funds(decision on merger is likelybefore24thJun’20). If the merger materialises, VIL hasan option to receive cash of Rs36bn (based on the agreed formula,which takes 60days’VWAP price of Bharti Infratel). VIL’ssurvival is equally critical for Bharti Infratel,hence we expect it to aid VIL in arranging liquidity


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