SC's AGR verdict will have devastating impact on telecom firms, say experts

The Supreme Court’s verdict allowing the Centre to recover Rs 92,641 crore in adjusted gross revenue (AGR) from telecom operators will impact the incumbent — privately owned Bharti Airtel and Vodafone Idea (VIL) — the hard, analysts said.

The extent of the impact will, however, depend on how soon the government chooses to secure the payment and the size of payments.

The definition of AGR has been a long-standing issue between the telcos and the Department of Telecom (DoT). Telcos pay licence fee and spectrum charges in the form of revenue share to the government. Simply put, the revenue amount, which is used to calculate this revenue share, is known as AGR. While DoT thinks that income earned from sources like bank deposits be included as AGR, telcos feel income from core telecom services should only be considered. 

Stakeholders expressed disappointment with the judgment, given that the India’s telecom tariffs are among the lowest in the world.

“The verdict will have a devastating impact on the telcos. Vodafone Idea will be worst hit with over Rs 28,000 crore impact,” said Naveen Kulkarni, head of research at Reliance Securities.

Around Rs 50,000 crore of the Rs 92,641-crore dues are owed by existing private telecom operators in the industry. While VIL owes Rs 28,308 crore, Airtel has to pay Rs 21,682 crore. Reliance Jio, the newest entrant, owes just Rs 13 crore to the Department of Telecom (DoT), according to initial estimates.

The remaining Rs 40,540 crore is owed by telcos that have shut shop or are under debt resolution proceedings like Reliance Communications (Rs 10,456 crore), Aircel (Rs 7,852 crore) and Tata Teleservices (Rs 9,987 crore). These telcos shut shop after the entry of Reliance Jio, while the remaining operators have continued to post heavy losses. 

Only 25 per cent of the Rs 92,641 crore consists of actual dues, with the remaining, including interest, penalty, and interest-on-penalty.“We continue to maintain that VIL remains on a weak footing given the deteriorating financial health, continued subscriber losses, and ongoing integration hurdles. Increased financial pain for VIL will continue to create optional value for Airtel and Jio in a potential duopoly market,” wrote Naval Sheth, research analyst, Emkay Global.

The brokerage estimates that this will lead an increase in operators’ debt, rise in licence fee and spectrum usage charge (SUC) payout based on the DoT’s formula of AGR and risk to Bharti Infratel’s tenancies with VIL’s rising financial stress. It is not clear whether Tata Tele’s penalty (Rs 13,000 crore) will be borne by Airtel.

An analyst, who did not wish to be named, said in case of an upfront payment, this move could drive VIL to bankruptcy given that the telco has been trailing Airtel and Jio in performance for the past two years now. 

Further, the payment will substantially drive up the net debt to Ebitda ratio of the incumbent operators.

 “This order comes at a time when the operating metrics of the telcos were showing some signs of improvement, which along with the recent attempts to inorganically de-leverage the balance sheets, was expected to assuage the debt metrics to some extent. However, these charges will weaken the debt metrics of the industry and protract the recovery in the sector,” said Ankit Jain, assistant vice president, ICRA.

The share price of Airtel fell 14.37 per cent intra-day, the biggest in seven years, before it recovered and ended the session at Rs 372.45, a gain of 3.31 per cent, as investors factored in that VIL would be the worst hit. The stock of VIL, on the other hand, fell by 23.4 per cent and ended Thursday’s session at Rs 4.33. The stock of Reliance Industries, the parent of Jio, rose 3.12 per cent at the end of day’s trade.

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