SC's AGR observations a setback for Voda Idea; others may survive

G Chokkalingam, founder & CIO, Equinomics Research
The Supreme Court on Thursday directed telecom companies to file a reply on the roadmap and timeline of payment of adjusted gross revenue (AGR) dues and securities they can provide as guarantee. The apex court's order came on telecos' plea that they be allowed to spread the payment of their dues over 20 years or less. Moreover, the bench, headed by Justice Arun Mishra, also asked the Department of Telecom (DoT) to reconsider payment demand raised against the public sector undertakings (PSUs), saying "our judgement never even dealt with PSUs." The court will next hear the AGR case again on June 18.

In my view, the Supreme Court's latest order is not a complete blow to the telecom sector. The SC has not dictated the telcos to pay the dues right away, which shows its flexibility on the matter. It has asked telecom companies to give bank guarantees and a plan of action, which is better than simply dictating that they pay up. This would have been a big setback to the industry.

During the hearing, Justice Mishra also said "How can 20 years (to pay the dues) be reasonable?". I agree with him on this to some extent, as 20 years is a long period and in technology, change is very fast and sudden. The technology may become obsolete, or, after 15 years, mobile mechanism itself may not exist, so what the court has said is right because nobody knows what the outlook for the industry will be after 10-15 years.

In any case, the payment of the AGR dues shouldn't pinch any of the major players except Vodafone Idea because the latter's debt to revenue is enormous (around Rs 30,000 crore of revenue and around Rs 1 lakh crore of debt). So, it would be a significant blow only for Vodafone Idea.  But the companies with better balance sheet should be able to tide over this situation successfully.

As for the stocks, we already hold Bharti Airtel, and, in fact, will even add some more shares, simply because after seeing the kind of interest global players are showing in Reliance Jio, I believe that there is a high possibility that ultimately even Airtel would attract such investors. This is because, now theoretically, telecom sector in India is now a monopolistic competition with only 2-3 players, one of which is weak at present. I am not as positive on Vodafone Idea simply because of the company's weak balance sheet. And, while the stock has rallied over 100 per cent recently, I would be very cautious on it.

As for the PSU stocks that have rallied post the AGR's verdict, one should remember that it is not going to change the outlook for these oil and gas companies. This order was only logical since they are not even directly related to the telecom business. So, I'd instead use this rally in PSU stocks post the SC order to exit.
G Chokkalingam is founder and CIO at Equinomics Research. Views are his own.

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