Voda Idea in danger of becoming a 'zombie' telco; may just about survive

The Supreme Court order brings some clarity to the telecom sector. The telcos will have to pay their AGR dues over a period of 10 years with the payment being made every February. The stock market reaction so far has been positive in terms of the Bharti Airtel stock rising, and negative for the Vodafone Idea stock, which has fallen sharply.

What does this do to the telecom sector? Reliance Jio (RJio) is fine and would have been fine anyway, regardless of the verdict. Analysts will need to examine the balance-sheets of Vodafone Idea and Bharti Airtel to see if they can handle the cash outflows.  

The telcos were asking for a 15-year period; so this verdict will be somewhat disappointing but it could have been worse. The initial impression is that Vodafone Idea will struggle to manage this level of staggered payments, given that it owes over Rs 58,000 crore. Some analysts say that Voda-idea could need to double Average Revenue per User (ARPU) to meet the payments out of cash-flows. That is utterly unrealistic. Bharti Airtel, on the other hand, will be able to pay up without being pushed too hard. However, even Bharti Airtel will find it difficult to make other capex allocations while this commitment is hanging over its head. Hence, it may not be able to bid for 5G spectrum and build out 5G networks at the ideal pace.

Spectrum auctions for 5G may need to be postponed anyhow due to the pandemic disruption. But as of now, only Reliance Jio would be comfortable with bidding for 5G spectrum and it claims to have a home-grown 5G network solution, which will allow it to build out network quickly. All said, Reliance Jio is a clear gainer in the sector. Bharti Airtel should be able to cope and may also gain as subscribers migrate out of the Vodafone Idea’s network. On its part, Vodafone Idea is in danger of becoming a “zombie” telecom service, but it may just about survive. It’s unknown what the parents of Vodafone Idea will do because it would need large capital infusions to thrive under the current circumstances. The banks may be cautious about taking further exposures to the telecom sector, so raising debt from the market to settle the AGR may not be easy.

Post-verdict, the sector will therefore, continue to have three private players. But one of them will be at a major disadvantage compared to the other two. Of the other two, Reliance Jio will clearly be able to enhance its leadership position. Bharti Airtel may eventually gain as it eats into the market-share of Vodafone Idea and it can also hope to capture some migration out of the state-owned BSNL.
Devangshu Datta is an independent market expert. Views are his own.

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