How Can Bharti Airtel And Vodafone Idea Pay Rs 60,000 Crore To Government

Vodafone Idea Ltd. and Bharti Airtel Ltd. will have to pay the government Rs 44,150 crore and Rs 34,260 crore, respectively, after the Supreme Court ruled last month that telecom operators will have to include non-core revenue to calculate levies.

During the quarter, Vodafone Idea provided for Rs 25,678 crore as charge towards AGR liability. The company is liable to receive the remaining Rs 18,472 crore from Vodafone Plc, a Vodafone Idea official told BloombergQuint on the condition of anonymity.

That will further strain the two companies’ balance sheets as their free cash flow won’t be sufficient to repay the amount.

The two operators would either have to raise more debt or equity financing or sell assets to repay dues.

In the past year, Sunil Mittal led-Bharti Airtel and Kumar Mangalam Birla led-Vodafone Idea had each raised Rs 25,000 crore via rights issues, using the proceeds to pare debt. Both issues had to be priced at deep discounts.

Monetisable Assets

Vodafone Idea has already lined up its stake in Indus Towers Ltd., and its fibre assets for sale. Yet, the amount raised from these asset-sales wouldn’t be enough.

The company’s stake in Indus Towers could be worth nearly Rs 4,500 crore, while its fiber assets can be d at close to Rs 16,000 crore, according to BloombergQuint’s calculations. Vodafone Idea is also looking to monetise its data centre, for which no valuation benchmark is available.

The company plans to monetise its intra-city and inter-city fibre network spanning 1.6 lakh kilometres. The exact valuation of the same isn’t known, but according to the company the replacement cost of fibre is generally Rs 10 lakh per kilometre—which could be a benchmark.

Sunil Mittal-controlled Bharti Airtel has the option to sell stake in its African unit, and its non-core assets to pare debt.

Bharti Airtel owns 56 percent stake in its listed African unit, which is d at close to Rs 12,700 crore.

It also owns a direct-to-home service, tower and fiber assets. Selling stake in these non-core businesses could fetch it nearly Rs 60,000 crore, according to BloombergQuint’s calculations.

Airtel holds 80 percent stake in the DTH business which is d at close to Rs 9,000 crore, while it holds close to 53.5 percent stake in its tower arm Bharti Infratel Ltd., d close to Rs 20,700 crore. Airtel also owns pan-India optical fibre network of 2.95 lakh kilometres.

But these s are subject to varying realisations on account of several factors including fibre-valuation imperfections and distress sale. Also, with the number of telecom service companies down to three, each owning distinct infrastructure, the buyer interest in tower and fibre assets is tough to ascertain. Though, to be sure, Mukesh Ambani led- Reliance Industries Ltd., whose telecom business Jio has severely disrupted the market, was able to recently strike a Rs 25,215 crore deal with Canada’s Brookfield Asset Management and other unnamed investors to sell units in its Tower Infrastructure Trust.

Headed For Liquidation?

Sans the asset sales, analysts said telecom operators are incapable of paying thousands of crores as dues and penalties as they continue to bleed from a tariff war
unleashed by Jio. Most agreed that Vodafone Idea would be worst hit among the two.

• Dolat Capital: Vodafone Idea may be compelled to re-examine its existence in the business.
• Edelweiss: Ruling is particularly negative for Vodafone Idea as the heavy liabilities arising thereof and its strained balance sheet can choke its investments in network.
• Bank of America Merrill Lynch: Weaker third player is positive from a competition perspective for Bharti Airtel.
  

They expect the government to support the industry by reducing licence fees and spectrum usage charges, increasing moratorium on annual spectrum payment, deferring zero IUC (interconnect usage charge), refund/adjust accumulated credit against future tax payouts and introduce floor price for voice calls or mandate price increases.

The government recently constituted a panel of senior bureaucrats to explore a financial bailout package for telcos. Meanwhile, this week the telecom department issued notice to both companies reminding them to pay all dues within the three months stipulated by the Supreme Court.

In their quarterly earnings announced on Nov. 14, both Airtel and Vodafone Idea have warned the piling liabilities threaten their existence as going concerns.

A few days ago, Vodafone Group Plc.’s chief executive officer Nick Read went so far as to say the India business may be headed for liquidation unless the government eases off on demands for mobile spectrum fees. Vodafone wrote off the carrying of its share in the loss-making joint venture in the half-year results.

The collapse of either telecom company will hurt the government the most. It could endanger thousands of jobs and inflate one of the world’s worst bad-loan piles, at a time when the Indian economy is slowing. Moreover, according to BloombergQuint’s calculations, the government would lose nearly Rs 1.82 lakh crore ($26 billion) in outstanding levies.

Watch BloombergQuint’s Soumeet Sarkar explain the magnitude of the AGR hit on the two telecom companies.