Moratorium Will Free Up Vital Capital For Vodafone Idea’s Survival

India’s moratorium on repayment of telecom sector dues is expected to free up vital capital for operators, more so for the beleaguered Vodafone Idea Ltd. that's struggling to survive.

The union cabinet 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 will, however, have to pay an interest at marginal cost of funds rate plus 2% starting Oct. 1.

ICRA Ltd. estimates a yearly cash flow benefit for about Rs 46,000 crore for the industry from the moratorium. According to a statement by Sabyasachi Majumdar, senior vice president at the firm, after the announcement:

• The freeze on spectrum dues provides a Rs 32,000 crore annual cash flow to the industry.

• The moratorium on AGR dues provides a yearly breather of around Rs 14,000 crore.

An ICRA report released prior to the measures had estimated that the moratorium on spectrum dues alone would improve Vodafone Idea’s cash flow by Rs 16,000 crore.

The lifeline comes as Vodafone Idea is teetering on the brink of collapse after a years-long tariff war by Reliance Jio Infocomm Ltd. and the Supreme Court order asking operators to pay pending dues worth thousands of crores based on an expanded definition of the adjusted gross revenue. The government on Wednesday announced an AGR relief as well.

The moratorium is a significant period for the telecom industry to repair their balance sheets as it provides time to improve cash flows, Naveen Kulkarni, chief investment officer at Axis Securities, told BloombergQuint over the phone. The move is revenue-neutral for the government as it will earn interest, he said.

Besides destressing balance sheets, freed up cash flows that can be used to deploy 5G, upgrade 2G networks to 4G, set up of new towers, lay fibre and improve quality, Ashwini Vaishnaw, telecom minister, said after the relief measures were announced.

How It Helps Vodafone Idea

The combined net debt of the three private sector players—Bharti Airtel Ltd., Reliance Jio and Vodafone Idea—stood at more than Rs 3.6 lakh crore as of March, according to Bloomberg data.

Vodafone Idea’s spectrum and AGR dues stand at Rs 1.6 lakh crore alone, contributing more than 84% of its Rs 1.9 lakh crore net debt, according to an Edelweiss Securities report.

The company is required to pay Rs 6,310 crore towards spectrum and AGR debt in FY22, while its cash Ebitda—a measure of operating profit—is estimated to be Rs 5,510 crore, said the report released prior to the measures. “Hence, a moratorium on AGR and spectrum payment will alleviate the concern.”

According to ICRA, the freeze of repayment of dues also gives enough time to the industry to increase tariffs, which is critical.

Edelweiss, however, cautioned it will be inadequate to address the net-debt-to-Ebitda mismatch and a fund infusion remains imperative to improve Vodafone Idea’s prospects.

Alongside, the government has announced a plan to prospectively rationalise the definition of AGR, 100% foreign direct investment through the automatic route in telecom and spectrum sharing to ease stress.

And it will increase the duration for which a company can hold spectrum from 20 years to 30 years. The airwaves can now be surrendered after a lock-in period of 10 years on paying a defined charge.

A prospective change in AGR definition is Ebitda accretive and a reduction in spectrum usage charges on sharing of airwaves eases cash flows to some extent, according to ICRA. Allotment of frequencies for 30 years and a calendar for auctions are also positive, it said.