Credit Suisse, CLSA, Deutsche Bank's Take On Telecom Relief Package
Analysts see India’s moratorium on repayment of dues by telecom operators to allay fears of a duopoly in the sector for the time being as it’s expected to improve cash flows for the carriers, especially the beleaguered Vodafone Idea Ltd.
The Union cabinet on Wednesday approved a relief package that includes a freeze on the repayment of statutory dues on adjusted gross revenue and spectrum payments for four years. The companies opting for it, however, will have to pay interest at the marginal cost of funds rate plus 2% starting Oct. 1.
The move is expected to address the liquidity stress in the sector. Besides de-stressing balance sheets, Telecom Minister Ashwini Vaishnaw said, freed up cash flows could be used to deploy 5G, upgrade 2G networks to 4G, set up new towers, lay fibre, and improve quality.
Bharti Airtel Ltd. and Reliance Industries Ltd. — the owner of Reliance Jio Infocomm Ltd. — said the package would support India’s digital ambitions. According to Vodafone Idea (Vi), the measures would help support a competitive and sustainable telecom sector in the country.
Here’s what analysts have to say about the relief package for the telecom companies...
The four-year moratorium and the government accepting equity as payment are the most important changes.
The equity option can generate a lot of confidence in Vi’s long-term future — although shareholder dilution will likely keep the investing case somewhat questionable.
It will help in the reduction of approximately Rs 40,000 crore in spectrum payments for Vi over the next four years, and should provide substantial cash flow for investment and spectrum purchase.
Rally in Bharti Airtel’s share price indicates that the investors getting more confident that the days of the government extracting extreme revenues from the sector are over.
Price wars to marginalise Vi will now be harder and more expensive.
The scenario of two private player market delayed by at least four years as there is a possibility of a lower subscriber shift from Vi to other telecom players.
The moratorium does not alter Vi’s long-term liability concerns. Therefore, the company will remain constrained on spending capex in 5G, fiber addition, etc.
The benefit of reforms to Reliance Jio is limited as there is no reduction in spectrum usage charges or licence fees.
High competitive intensity to sustain and could further delay price hikes.
Reforms will provide a much-needed boost for the sector and the investors in the sector, and shows the government’s intent of promoting healthy competition in the sector.
The deferment of all industry dues (AGR plus spectrum) provides Vi with much-needed life support, reducing its immediate cash liabilities.
The moratorium will allow Vi to look for an equity investor to help reduce its liabilities and provide cash for upcoming 5G capex, and pursue tariff hike, to make its business operations financially viable.
Bharti Airtel is well placed to benefit from any development. Though it was cash self-sufficient, the reforms enhance its cash flows, helping it prepare a larger war-chest for the upcoming 5G capex cycle.
The measures announced by the government will address cash flow issues plaguing Vi, which faces sizeable NCD repayments of Rs 6,000 crore from December 2021 to March 2022.
The measures have resuscitated the idea of a three-player market for the time being.
For long-term sustainability though, Vi will require not only capital infusion, but a sizeable tariff hike for 4G pre-paid customers. Policy support alone cannot solve Vi’s problems.
The industry can slip towards a duopoly, which would benefit Bharti Airtel and Reliance Jio if Vodafone Idea fails to infuse capital or raise tariffs.
Given overall uncertainty, investors should stay invested in operators with strong balance sheets.
The moratorium ensures the survivability of Vi in the near to medium term.
Vi’s cash flow will improve by Rs 9,100 crore in FY22, while over FY23 to FY26, the cash flows will improve by Rs 24,900 crore.
The moratorium will provide extra cash flow between Rs 11,500 crore and Rs 13,000 crore to Bharti Airtel over the FY23 to FY26, which it can use to pay the debt.
Reliance Jio can increase its focus on its customer acquisition strategy without the overhang of a regulatory nudge to hike tariffs at present.
The reforms only address the liquidity stress in the sector and do not solve the elevated leverage levels in the sector.
The sustainability of the sector is still predicated on tariff revivals. The government needs to implement more structural reforms like floor tariffs.
AGR relief will result in $11 billion cash flow savings till FY25 for Vodafone Idea and will cut its urgency to raise tariffs.
Among operators, spectrum burden for Vi is highest at Rs 1,06,000 crore/$14.5 billion; while Reliance Jio is at Rs 65,600 crore/$9 billion and Bharti Airtel at Rs 62,700 crore/$8.6 billion.
The relief will improve the health of the debt-laden sector; India mobile will remain a three-private player market.
The measures are meaningful for Vi where huge payments are coming up over the next few months, combined with the delay in the planned capital-raise had made its leverage situation particularly tenuous.
Provides cash flow relief to Vi up to Rs 24,000 crore/year and addresses near-term existential concerns for the company and gives it much-needed breathing space.
The onus now shifts to Vi to complete its capital-raise, stem its subscriber losses, raise ARPUs and start reinvesting in the network.
The announcements do not provide any relief on the high incidence of statutory levies on the telecom operators.
The moratorium can help Vodafone Idea save Rs 87,700 crore ($11.7 billion) in cumulative cash flows until FY26E.
Vodafone Idea’s ARPU would have to reach Rs 320 by FY27 to be free cash flow-neutral (assuming they do not lose any more subscribers), which will likely be difficult to achieve given industry pricing.
For Bharti and RIL, higher market share or higher ARPU (or a combination of both)—remains highly likely.
Vodafone Idea will continue to lose market share in the near term given the company’s run-rate Ebitda ($700 million annualised) is lower than its capex and interest payment obligations.
No spectrum usage charges have the potential to add 400 basis points in Ebitda margin over a period of time for telecom companies, or 7-10% in incremental wireless Ebitda.
A moratorium on dues would likely provide Rs 41,000 crore in annual cash flow relief to the top three private telecom operators, easing VI’s liquidity concerns.
It will provide cash flow relief for Bharti Airtel and Reliance Jio to invest in 5G networks, if they were to opt for moratorium.
With the accrual of interest during moratorium at relatively higher interest rates (8-10%), operators’ future repayments and overall Government of India debt is likely to increase sharply.
VI’s annual Government of India dues repayment post the four-year moratorium will likely increase from Rs 24,800 crore currently to Rs 43,000 crore, while its GoI debt will likely increase from Rs 1.6 lakh crore as of FY21-end to Rs 2.2 lakh crore post the end of the moratorium period.
With most reforms applicable prospectively, there is unlikely to be any significant near-term cost-saving or revenue uplift for the telecom operators.
A four-year moratorium helps Vi’s cumulative cash flows by Rs 1 lakh crore ($14 billion) although the amounts will have to be paid later on an NPV neutral basis.
With an estimated annual operating cash flows of Rs 14,000-17,000 crore, Vi can increase capex to Rs 10,000-12,000 crore, which is essential to stop the market share loss.
The moratorium will improve Vi’s ability to refinance upcoming debt repayments, including the Rs 6,000 crore NCDs due in December and March.
The deferral of spectrum payments does not include 2021 auctions, limiting immediate cash benefit for Reliance Jio, which had bid aggressively in the 2021 auctions.
For Bharti Airtel, the annual savings from spectrum and AGR deferrals will be around Rs 11,000-11,500 crore.