Why Supreme Court's judgement has pitted Vodafone Idea against Airtel and Reliance Jio?

It's a fight for survival for Vodafone Idea yet again. Nearly two months after filing the review petition in the Supreme Court, the incumbent Vodafone Idea has recently been denied relief from the court on their AGR (adjusted gross revenues) dues. The dismissal of petition has closed the doors for incumbents (Airtel and Vodafone Idea) who were hoping for a big succour from the Supreme Court. Even though incumbents are evaluating other options, such as filing of a curative petition, the chances of further relief from the court and the government seem unlikely.

With this judgement, Vodafone Idea, which was already out on a limb, has been further pushed down on the path of collapse. Not just the AGR blow, Vodafone Idea has been struggling on nearly all fronts, which include posting net losses for three years in a row, losing subscribers by millions, and facing issues with its network integration programme. The telco has lost nearly 105.4 million subscribers since the merger between the erstwhile Idea Cellular and Vodafone India.

Today, Vodafone Idea simply doesn't have money to pay up dues, and if it fails to clear the dues, there's a strong possibility that it might file for bankruptcy. "With the Aditya Birla and Vodafone groups unwilling to infuse equity in Vodafone Idea, we see a strong possibility of Vodafone Idea going for bankruptcy. We believe there is limited scope for government help given the involvement of SC," said Credit Suisse in a report. Analysts at Motilal Oswal said that the company has no source of cash to pay the liabilities and it was entirely dependent on the payment relief. "It has cash merely to continue operations for the next two-three quarters," it said in a report.

If Vodafone Idea goes belly up, two of its private rivals - Reliance Jio and Airtel - will be the biggest beneficiaries. While Jio is expected to gain more than Airtel, given that Airtel has also been severely hit by the AGR order with dues of Rs 35,586 crore, the fall of Vodafone Idea would automatically give a life jacket to Airtel to save itself from drowning.

Vodafone Idea's exit would mean that its 336 million subscribers would be up for grabs, for both Airtel and Jio. It's estimated that Jio would grab about 60 per cent of these subs, and the remaining would go to Airtel. While BSNL and MTNL would also be contenders, their gains would likely be negligible. "Airtel and Jio would not only gain subscribers in a short time span (which would have taken them ages otherwise), they would also benefit from the recent tariff hikes, which are going to play out well in the long run," says a telecom consultant.

Analysts at ICICI Securities said that they continue to prefer Bharti Airtel in the telecom sector as it is better prepared for a worst-case scenario on the AGR front in addition to its superior operational execution. "Vodafone Idea promoters, Vodafone Plc and Aditya Birla Group, have already mentioned that if the entire AGR liability has to be paid, they will have to shut shop," an ICICI Securities report said.

"Given the adverse situation for Vodafone Idea, Jio and Airtel could gain disproportionately. Irrespective of an adverse ruling, Airtel has best hedged position even if it is required to pay the AGR liability," said analysts at Motilal Oswal in a report.

Experts say that the Airtel has handled the AGR situation better than Vodafone Idea. How? Airtel has been sparingly talking about its troubles unlike Vodafone Idea, which saw its promoters crying out loud, and pinning all their hopes on the relief from the government and courts. In fact, at one point, the telecom minister Ravi Shankar Prasad had to slam Vodafone Group for threatening to quit India. By doing so, Vodafone Idea seems to have lost its appeal to the investors while Airtel managed to raise $3 billion (through QIP and overseas bond) to pay its AGR dues.

Analyst at Bank of America Merrill Lynch said that the despite the expected higher penalty for Airtel, they would be buyers of Airtel because a weaker third player (that is Vodafone Idea) is positive from a competition perspective for Airtel and could lead to faster than expected increase in revenue market. "We find Reliance Industries' subsidiary Jio well placed to capitalise on its competitor weakness. Jio could end up having a first mover advantage on 5G if these penalty payments impact incumbent telcos ability to invest in capex going forward," said BofA-Merill Lynch analysts in a report.

Not just handling the issue better, Airtel is in a much better financial position than Vodafone Idea. For instance, Airtel has more cash on its book (about Rs 40,000 crore) compared to Vodafone Idea's Rs 15,400 crore. Airtel's net debt (Rs 1.14 lakh crore) is much lower than Vodafone Idea's net debt of Rs 1.59 lakh crore. After dethroning Airtel as the largest telecom operator in August 2018, Vodafone Idea has recently lost its top spot to Reliance Jio, which now has the highest number of subscribers (369.93 million). Even as the musical chairs in the telecom sector continue, there is strong possibility that the number of chairs would go down from three to two.

Also read: Bharti Airtel share price hits fresh 52-week high despite Supreme Court's AGR verdict

Also read: Vodafone Idea share price crashes 39% on Supreme Court's AGR verdict, falling subscriber base