Break Point
two weeks after the Supreme Court's judgement on adjusted gross revenues (AGR), which rattled the telecom sector, a Delhi-based top corporate lawyer, whose clients include the likes of Reliance Jio, Bharti Airtel and Vodafone Idea, was travelling to the UK for meetings with foreign lawyers who advise companies on overseas investments. The key takeaway from his meetings was that India is no longer an attractive investment destination in general. "Everybody was asking about the AGR judgement. They couldn't believe that the liability of a court judgement is so huge that a telco of Vodafone's size is mulling withdrawing from India," the lawyer says.
Being one of the most litigious sectors, telecom was long seen as the El Dorado for corporate lawyers. But the recent chain of events has shattered even their confidence. Why? The amount that the telcos are liable to pay for the lost case runs into billions of dollars, and can potentially result in one or more telcos winding up. There are currently three private telecom companies and two public sector ones vying for the 1.19-billion Indian subscriber market.
It's an existential crisis for legacy operators as they will have to shell out over Rs 92,642 crore for licence fees and another Rs 55,054 crore for spectrum usage charges (SUC) under the AGR dues. Although the demand has been made from 15 operators, over 70 per cent has to come from just three operators - Vodafone Idea, Airtel and the insolvent Reliance Communications. Many of the other penalised operators have already shut shop.
"We consider the recent SC decision on AGR a big event for the India telco sector which could turn it into a dominant two-player market between Airtel and Jio," Bank of America Merrill Lynch said in a November 13 report.
On the recommendations of the Committee of Secretaries (CoS), which was set up late October to mitigate the financial stress in the sector, the Cabinet Committee on Economic Affairs recently announced a two-year moratorium on deferred spectrum instalments that these telcos were to pay in 2020/21 and 2021/22. For instance, Vodafone Idea is estimated to pay about Rs 23,920 crore in these two financial years to the government whereas Airtel has to pay Rs 11,746 crore. These telcos can heave a sigh of relief by postponing these payments until April 2022.
But there's a catch. While providing relief, the government has made it clear that it will still charge interest for these two years on spectrum dues. That means the payout for the future payments, post-2022, would be higher than previous estimates.
Typically, after winning the spectrum in auctions, telcos pay 25-50 per cent of the bid amount upfront and the remaining over 15-20 years at an interest rate of 9.3-10 per cent. The two-year moratorium will somewhat ease the short-term liquidity concerns for telcos but might not result in any material change in their financial health. Also, there's no clarity on whether more relief measures - such as reduction in AGR liabilities or lowering of licence fee and spectrum usage charges (SUC) - will be announced in the days to come. "Though the government has not announced any licence fee reduction, we think a decision on this can be made in the coming months as the regulator (TRAI or Telecom Regulatory Authority of India) has been in favour of this for some time," stated a November 21 Credit Suisse report.
Telcos are reportedly planning to approach the apex court for relief on AGR. In the second quarter 2019/20 earnings call, Vodafone Idea's CEO and MD, Ravinder Takkar, elaborated on the legal remedies the company could pursue. "Obviously, we have a review petition that we are working on, and we will be filing it fairly soon. We also have something called a curative petition which goes to a five-judge bench which is different than the bench that (gave) the original judgement," Takkar said.
In the September quarter, the losses of Vodafone Idea and Airtel shot through the roof due to provisioning for AGR dues. Vodafone Idea reported a net loss of Rs 50,922 crore, the highest-ever quarterly loss in Indian corporate history. Airtel fared slightly better and reported a loss Rs 22,830 crore in the same quarter.
Amidst growing chatter that Vodafone Idea might file for insolvency, the company has categorically denied reports of exiting the market, but it's difficult to understand how it can sustain operations in the absence of support from its parents - Vodafone Group Plc and Aditya Birla Group. According to a Citi research, Vodafone Group has already committed to 'ring-fence' India from the rest of the group and not put in additional capital. In a note to stock exchanges, Vodafone Idea said that it cannot confirm or clarify whether the Aditya Birla Group will bring in fresh capital into the company as it is not privy to such discussions and decisions.
According to analysts, the gross cash balance of the incumbents (as on September 30) is far less than the potential payable AGR liability. For instance, Vodafone Idea's cash and cash equivalents stand at Rs 15,390 crore and networth at Rs 59,568 crore (2018/19) as compared to the self-assessed AGR liability of Rs 44,150 crore. Airtel's cash and cash equivalents are Rs 8,425.6 crore and networth Rs 71,348 crore (2018/19); its AGR provisioning is Rs 34,260 crore. It is estimated that the AGR demand for Vodafone Idea cannot be met with current cash even if the telco does not make any spectrum payment and capex over the next three years.
Ticking Time Bomb
The telcos are racing against time as they have less than 60 days (around January 22) to pay the dues to the Department of Telecom (DoT), as mandated by the apex court.
In the earnings call, Vodafone Idea's Takkar said that several secretaries in ministries have indicated to him that they want to see three private players and one public player in the sector. "They have all said that they want this sector to be healthy. It is a strategic sector? The other thing that they continue to recognise is that there is stress in this sector, which has been increased because of this AGR ruling?," he told a bunch of analysts.
Even prior to the AGR ruling, the telcos were struggling. The ultra-cheap cellular tariffs introduced by Mukesh Ambani-led Reliance Jio over three years ago continue to hurt its rivals. The incumbents played along, and it is only recently that they changed the strategy, in a seemingly coordinated way, in favour of raising tariffs.
Jio, too, has indicated that it will raise tariffs in a few weeks. "We understand that the TRAI is likely to initiate a consultation process for revision of telecom tariffs. Like other operators, we will also work with the government?and take measures, including appropriate increase in tariffs, in the next few weeks in a manner that does not adversely impact data consumption or growth in digital adoption and sustains investments," a Jio statement said a day after the others announced tariff hikes. The regulator is apparently looking at floor pricing, a concept that is mentioned every few quarters. But the proposal for minimum industry-level tariff for voice and data has been discarded on several occasions in the past.
Not only is there pressure on the tariff front, telecom companies have to continuously invest in networks and buy spectrum to stay in the game. This has resulted in a significant spike in their debt and interest outgo, denting profitability. Airtel's debt stood at Rs 1.18 lakh crore as compared to Rs 1.02 crore for Vodafone Idea as on September 30. Vodafone Idea is also in the process of integrating the networks of erstwhile Vodafone India and Idea Cellular and has not yet realised all the potential benefits of the merger.
Analysts are expecting Airtel to raise funds - about $3 billion ($2 billion in debt and $1 billion in equity) to pay the AGR dues. It's unclear what Vodafone Idea plans to do. The last big equity infusion in Vodafone Idea took place in April this year when its promoters put in about Rs 18,250 crore in the company as part of the Rs 25,000-crore rights issue.
What's Next?
Despite the relief measure, it's still not clear if the telcos can continue to operate. Some experts think that given the stretched balance sheet of telcos, the government could have been more sympathetic to them, while others say that for an image-conscious government, the bailout package would send a wrong message. "I don't see any positive impact of the government's move. It doesn't address the key concerns of the operators. I doubt that more relief would come, given that the government is battling on so many fronts - economic crisis, jobs crisis... It seems that the government is spread too thin at the moment," says Mahesh Uppal, Director at consultancy ComFirst.
Experts say that the chances of one operator folding up still exist. In the worst case scenario, the number could go up to two. "There are doubts about these telcos having funds to meet obligations. If a telecom operator goes down, there will be repercussions for the economy, foreign investments and consumers. It's a complicated situation because there's involvement of judiciary," says an industry expert.
"We believe the Indian wireless industry will consolidate further in case the government does not offer a material relief on AGR liabilities and other aspects like recurring regulatory levies, deferred spectrum payments and, potentially, a floor on pricing," stated a Kotak Institutional Equities November 14 report (the spectrum payment deferment came through on November 20).
The AGR issue could also delay the 5G spectrum auction (in 700 and 3500 megahertz bands) by at least a year. Telecom Minister Ravi Shankar Prasad has been pushing for auctions by the end of this year or early next year but the sorely-strained telcos are not in a position to participate that soon. "We do not expect telcos to bid for 5G spectrum in the next 12-18 months. We think mass scale deployment of 5G in India will pick up only when 5G achieves scale in China as it will lead to more affordable handset and equipment prices for 5G," analysts at Bank of America Merrill Lynch said in a report.
Email queries sent to Vodafone Idea and Bharti Airtel didn't elicit responses.
The Worst is Yet To Come
It seems that the telcos have taken only a partial hit on their P&Ls on account of AGR dues. As per the September quarter results of Vodafone Idea, it has assessed the total AGR liability at Rs 44,150 crore - Rs 27,610 crore towards licence fee and Rs 16,540 crore towards spectrum usage charge. For Airtel, the comparable number is Rs 34,260 crore, including the recent provisioning of Rs 28,500 crore.
The DoT had asked these telcos to do a self-assessment and submit the dues. But the provisioning is way short of the estimates submitted by the telecom ministry in Lok Sabha. For instance, Airtel's total dues are Rs 35,586.01 crore, which is Rs 1,326 crore short of the current provisioned amount. Also, this doesn't include dues pending on Tata Teleservices and Telenor India, which were acquired by Airtel. Similarly, Vodafone Idea's self-assessed amount is about Rs 8,888 crore short of the telecom ministry's estimates of Rs 53,038.6 crore. One can argue that the telcos were expecting bigger relief from the government and, hence, their provisioning was on the lower side. But their options are becoming limited and, in such a scenario, they are staring at another disastrous quarter.
"It's a significant financial obligation for the telcos and there is need for a constructive dialogue between the government, the telcos and the regulatory authorities to ensure a workable outcome for all stakeholders, including customers. Telecom should be considered as core infrastructure. I am hopeful that a workable solution will be found to make the telcos sustainable," says Raja Lahiri, Partner, Grant Thornton India.
With only three large telecom operators in the market, an exit by even one will put the entire sector in danger. "If Vodafone exits India, there will be huge implications. It's important for the government to understand that they can earn big in one incident [AGR], but what about the regular income that it gets from licence fee and taxes? Telcos also pay a huge amount to the exchequer for spectrum purchases every few years," says Harsh Walia, partner at law firm Khaitan & Co.
For now, all that the telcos can do is wait for the government to throw them another lifeline. If that doesn't happen, it may just be the end of the call.
@manukaushik
