Street's contrasting reaction to AGR verdict hints at telecom duopoly

Brokerages have raised their target price on Airtel and suspended the rating of Vodafone Idea
The stock market on Friday gave contrasting opinion on the financial impact of the Supreme Court (SC) rejection of mobile operators’ review plea on adjusted gross revenue (AGR) dues.

While Bharti Airtel stock price scaled a new high due to fresh buying by investors, Vodafone Idea stock was down 25 per cent as hordes of investors exited the counter.

Airtel ended the day with gains of 5 per cent that pushed its market capitalisation (m-cap) to an all-time high of Rs 2.57 trillion. In contrast, Vodafone Idea’s market capitalisation fell to Rs 12,960 crore. At its intra-day low, Vodafone Idea was down nearly 50 per cent from its Thursday's closing price.

Analysts say the contrasting price movement suggests that equity investors are increasingly losing faith in Vodafone Idea while Airtel is seen as a winner in the country’s rapidly consolidating mobile telephony market.

A Credit Suisse report said the SC decision pushes the sector closer to a two private sector operator scenario. “We see a very low probability of success of mobile operator’s curative plea. 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. Airtel should benefit from further sector consolidation,” Varun Ahuja and Viral Shah wrote in the report.

According to Credit Suisse there is 65 per cent probability that only two private mobile operators would be left in the market; 29 per cent probability of BSNL taking over Vodafone Idea or a weakened third operator emerging from bankruptcy; and only 15 per cent chance of Vodafone Idea’s survival.

Analysts at New Street Research are equally pessimistic about Vodafone Idea’s chances. “Vodafone Idea owes $7 billion (around Rs 50,000 crore) and Airtel owes $5 billion (around Rs 35,000 crore) payable by January 23. Since Vodafone Idea has no way to raise the amount, we are almost certainly headed towards a two-player market,” the brokerage said.

Both brokerages have raised their target price on Airtel and suspended the rating of Vodafone Idea.

Airtel is now 20 times bigger than Vodafone Idea in terms of m-cap, even though former is only around 30 per cent bigger than the latter in terms of fixed assets. At one point in early 2015, the m-cap of Vodafone Idea (Idea Cellular then) was just half that of Airtel. After Friday’s gains, Airtel is now India's 12th most valuable company in terms of m-cap against 21st a year ago. Analysts say the sharp fall in Vodafone Idea’s m-cap in the past one year has made it difficult for the company to raise additional resources. “The situation is precarious for Vodafone Idea, given that liability is more than twice its current m-cap (its 13 per cent of m-cap for Airtel),” writes Saurabh Handa of Citi Research. 

“In the absence of government intervention, the market would turn into a duopoly, benefitting Airtel and Reliance Jio. While Airtel will have to now shell out around Rs 34,000 crore, it would be net-positive since revenue would spike without a concomitant addition of costs,” analysts at Edelweiss Securities said.

Vodafone Idea saw a sharp deterioration in its balance sheet ratio after it posted corporate India’s biggest loss during the September 2019 quarter. The firm’s net debt to equity ratio jumped to a record level of 4.5x at the end of September against 1.24x at the end of June and 1.8x at the end of March. This makes Vodafone Idea one of the most indebted firms in the country. 

At around Rs 24,000 crore at end of September 2019, Vodafone Idea’s net worth was down nearly 70 per cent compared to the numbers at the end of June. In comparison, Airtel’s net debt to equity ratio deteriorated by only around 40 basis points on sequential basis to 1.7x at the end of September 2019 against 1.3x at the end of Q1FY19 and 1.65x at the end of March 2019.

The provisioning for AGR dues lead to a 23 per cent decline in Airtel net worth on consolidated basis compared to the numbers at the end of June.

But Airtel boosted its balance sheet and net worth by raising nearly Rs 40,000 crore worth of fresh equity in two tranches during FY20 so far. Analysts say this provides Airtel with the cash to comfortably meet its AGR liability.

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