10 years to pay AGR dues puts a question mark on Vodafone Idea's survival

Since it is positive for Bharti and RIL these two heavy weight stocks are likely to remain resilient, supporting the markets
Telecom companies in India have been under pressure due to adjusted gross revenue (AGR) payment dues to the government and this had resulted in the matter getting referred to Supreme Court. Over the years, we have seen significant numbers of cellular operators shut operations due to various reasons. The most common reason was financial viability of keeping the business running, or have got merged with other companies – not to forget the 2G scam.

It is a known fact that the telecom business is capital intensive and needs constant flow of capital investment to keep the company afloat and run it profitable. This may be due to various reasons, such as spectrum and other charges to regulator and the government, competition from large players, investment in existing technology upgradation etc. The AGR issue has added to the existing financial problems of cellular operators with very few lenders and a rise in debt on balance-sheet of telecom companies. In this backdrop, the funding options remain limited for telecom companies.

At present, we have three companies cater to the large subscriber base and it will not be viable to have a duopoly – a two player market in India. With the government’s push towards digital India and improving connectivity pan-India, both for voice and data investments by telecom companies to improve infrastructure and the quality of service are likely to move up further. The current outstanding on AGR front is Rs 25,976 crore for Bharti Airtel, Rs 50,400 crore for Vodafone Idea and Rs 12,601 crore for Tata Tele as of date.

The SC verdict giving a ten year time frame for payment of AGR dues with 10 per cent upfront payment can be regarded as reasonably fair. Since the Supreme Court has not said anything about the dues of RCom, Aircel and Videocon, this is certainly very positive for Reliance Industries – owned Reliance Jio (RJio) and Sunil Mittal-controlled Bharti Airtel.  However, the 10-year time frame puts a question mark on the survival of Vodafone. Indian telecom sector moving to a virtual duopoly is not a desirable development.

For the stock market the verdict is mixed. Since it is positive for Bharti and RIL these two heavy weight stocks are likely to remain resilient, supporting the markets. Vodafone’s woes, apart from impacting the stock, will also impact the stocks of banks which have lent to Videocon. The problem, if any, would be faced by companies having a weak balance-sheet and financials as the yearly AGR outflow will put additional financial burden. The other problem that weaker players may be faced with over time is the migration of subscribers to other strong players.    

That said, the Supreme Court has not mentioned anything on Spectrum Usage Charge (SUC) in the current judgement and this may be a point of contention in future as and when a review petition is filled. For spectrum to be sold or not, the Supreme Court has diverted the matter to National Company Law Tribunal (NCLT). All this, however, is still subject to a review petition being filed by incumbents going ahead.

Gaurang Shah, is head- investment strategist at Geojit Financial Services. Views are his own.

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