SC talks tough – reserves order on time window
Next SC hearing scheduled for 10th Aug’20
* After a marathon >3-hour hearing on 20th Jul’20, the Honorable Supreme Court (SC) disallowed any more affidavits, spoke tough and ensured the AGR case concluded with all stake holders giving their views.
* The SC reserved its order on the time window to be provided to telcos and has directed companies under liquidation (RCOM, Videocon and Aircel) to submit their documents within 7 days. The SC will consider this in its next hearing on 10th Aug’20.
* In summary, the SC (a) made it clear that a 20-year period is too long for AGR repayment – TTSL has sought 7-10 years for the AGR repayment while Bharti/VIL have requested for 15 years, and (b) in strong words, not only dismissed any reassessment of AGR liabilities, but also warned of contempt proceedings, if DoT/telcos act on it.
* This is a big setback, especially for VIL, which is under dire liquidity stress. While VIL/Bharti/TTSL have paid INR78.5b/INR180b/INR42b, according to DoT, repayment of INR504b/INR260b/INR126b still needs to be made.
* A 20/15/10-year grant would result in Bharti’s cash outgo of INR26b/INR30b/INR39b and VIL’s cash outgo of INR51b/INR59b/INR75b at 8% interest rate. VIL will need ~73% ARPU hike (i.e. INR85 ARPU increase), in order to service its obligations. Lower payment tenure may put pressure on VIL’s cash flows. Similar tariff hike could provide incremental EBITDA of INR193b/INR333b to Bharti/RJio (i.e. 42%/77% increase).
* We maintain our stance on VIL – the company has a bleak future with high cash requirement. We are bullish on Bharti/RJio with TP of INR690/INR905 per share.
SC reserves order; Rules out any possibility of reassessment
After asking telcos to make reasonable upfront payment and come up with a roadmap for AGR repayments in its last hearing, the SC has noted that a repayment timeline of 20 years is a very long period. It has asked telcos to come up with a reasonable time period. For the timelines, TTSL has sought 7-10 years repayment while Bharti/VIL have sought 15 years (VIL initially requested for 20 years and later reduced the timeframe). However, the government has maintained its stance for a 20-year repayment p eriod as telcos could go bankrupt in case of an extension failure. Furthermore, the SC has asked VIL to secure AGR dues payable. To this, VIL responded saying that the government could retain its INR80b GST dues w.r.t. to the AGR dues and mentioned that it has no assets except spectrum. The government has maintained that it considers spectrum as security and could auction it to secure dues, in case of payment default. In terms of amount, the SC has reiterated that there is no scope of reassessment of AGR dues and the amount calculated by the DoT would be considered as final. Moreover, in maintaining its harsh stance, the SC has mentioned that any proceedings to re-assess the amount would be in violation of the court and could result in contempt proceedings against the entities involved. This would result in Bharti/VIL/TTSL’s AGR dues standing at INR260b/INR504b/INR126b after considering repayment of INR180b/INR78.5b/INR42b. The SC has reserved its order on the time window for the AGR repayment. Further, it has directed the companies under liquidation to submit their records within 7 days with the next hearing scheduled on 10th Aug’20.
Price hikes inevitable – VIL requires INR85 ARPU hike to sustain
Considering dues at 8% interest rate (to maintain NPV), Bharti/VIL would require to pay an annual amount of INR26b/INR51b, if the SC grants a time frame of 20 years (refer Exhibit 1). This amount would increase to INR30b/INR59b with a repayment period of 15 years (refer Exhibit 4) and would increase to INR39b/INR75b on 10-year schedule (refer Exhibit 5). We estimate VIL would require INR85 increase in ARPU to achieve EBITDA of INR300b by FY22E (from current estimated EBITDA of INR97b in FY22E) to pay cash obligations toward (refer Exhibit 2) (a) INR165b deferred spectrum liability, (b) INR51b annual AGR payment, (c) cash interest cost of INR30b to lenders, and (d) capex of ~INR53b. In our working, we have not factored in any additional subscriber churn, which could make it worse given the negative consumer sentiment around VIL’s outlook and network capability. Similar tariff hike (i.e. INR85 additional ARPU) would result in incremental EBITDA for Bharti/RJio of INR193b/INR333b (i.e. 42%/77% increase from our current estimate in FY22E). We believe the tariff hike is inevitable due to the low tariffs, improving bargaining power and VIL’s survival issues (Refer our earlier note for details).
Maintain bullish stance on Bharti and RJio
The future for VIL looks bleak due to its high leverage and huge cash requirements. We continue to remain bullish on Bharti/RJio due their healthy balance sheets and strong network capabilities. We value Bharti on FY22E EV/EBITDA multiple of 12x on its India business and 6x on Africa business to derive TP of INR690/share. We believe RJio should garner premium valuations due to lower leverage post its capital reorganization and series of stake sales. Thus, we assign 15x EV/EBITDA on FY22E EBITDA to reach TP of INR905/share.
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