The Supreme Court recently agreed upon a definition of Adjusted Gross Revenue (AGR) in a key judgment. This means private sector service providers owe a total of Rs 1.3 trillion in back payments and interest, based on AGR calculations going back to 2003. Airtel India, Jio and Vodafone Idea jointly owe Rs 92,000 crore.
Vodafone Idea may lack the financial resources to make the AGR payments. It has absorbed huge losses since 2016-17. It has $14 billion of debt on the balance sheet. It raised Rs 25,000 crore with its last rights issue, and it does have about Rs 75,000 crore in cash or cash-equivalents. But that hoard is inadequate to fund a combination of capex needs, debt-servicing requirements and the new AGR demand.
Airtel is in somewhat better shape. It can probably make AGR payments though it will be stressed. Jio will not have a major problem. It is in better financial shape than Airtel or Idea-Vodafone and, since it started services only in September 2016, it has lower AGR outstandings. However, even Jio is trying to deleverage, perhaps in order to get ready for an IPO. So, it will also be unwilling to match 5G auction reserve prices.
In the meantime, the government has come up with a merger and rescue plan for BSNL and MTNL, which is estimated to cost Rs 56,000 crore. Both PSUs are enormously overstaffed, and have been making huge losses. BSNL has 176,000 employees and MTNL has 22,000. The employee costs of BSNL and MTNL are 75 per cent and 87 per cent of total income respectively. In contrast, Airtel’s employee strength in India is a little less than 15,000 and it generates over 2x the combined revenues of both PSUs.
The net loss for BSNL in 2017-18 was Rs 7,990 crore on revenues of Rs 22,670 crore. In 2018-19, a Parliamentary Statement estimates BSNL would lose Rs 14,200 crore, with revenues down to Rs 19,300 crore. MTNL, which only services Mumbai and Delhi, had net losses of Rs 2,970 crore on consolidated revenues of Rs 32,00 crore in 2017-18. BSNL has 115 million mobile subscribers and an asset base valued (2017-18) at Rs 42,500 crore on the books. Its optic fibre (OFC) network of 750,000 route-kilometres would be worth over Rs 50,000 crore in commercial terms.
Nobody would be prepared to buy either PSU without downsizing. One sensible strategy would be to sell off the optic fibre and mobile tower assets, port subscribers out to the private sector, and use the funds thus raised to meet wage bill and pensions. Another could be to sell the physical assets and lease them back, to lower costs, while arranging VRS. The unions would oppose such plans.
The government package will kick the problems down the road. It speaks about a VRS scheme, which it doesn’t detail. It also hopes to monetise assets worth Rs 38,000 crore. Right now, the government would pay for 4G spectrum and raise Rs 15,000 crore in bonds to be serviced by the two PSUs.
Where does this leave the industry? The government may have pushed things too far in its efforts to milk telecom. The merger-rescue plan for the PSUs seems sketchy. The three private service providers already owe $40 billion equivalent and two of the three are registering losses. The new AGR demands add to the burden. There won’t be happy bidders for 5G spectrum.