What Supreme Court’s AGR Relief Means For Bharti Airtel, Vodafone Idea

The Supreme Court ordered telecom companies to pay their pending statutory dues worth thousands of crores over 10 years, in a relief to the sector yet to recover from the tariff war unleased by Reliance Jio Infocomm Ltd.

The operators will have to pay 10% by March 31, and the rest in instalments starting April 1, 2021.

Here’s what the judgment means for Vodafone Idea Ltd. and Bharti Airtel Ltd., the operators with the largest pending dues.

Bharti Airtel

Bharti Airtel owes Rs 25,976 crore to the Department of Telecommunications, Solicitor General Tushar Mehta told the Supreme Court.

• The carrier needs to pay Rs 3,871 crore every year—about 8.6% of the annual operating income, according to BloombergQuint's calculation based on outstanding dues.

• The additional interest cost over 10 years will be Rs 12,376 crore, assuming an interest rate of 8%.

• The dues go down to Rs 2,600 crore annually if no interest is charged.

Can It Pay?

Bharti Airtel gained 200 basis points in market share in the quarter ended June. Its average revenue per user rose 2% quarter-on-quarter to Rs 157. Morgan Stanley estimates ARPU at Rs 162 for 2020-21 and Rs 177 in 2021-22.

But, according to Rajiv Sharma, head-institutional equity research, performance coach and strategist, SBICAP Securities, ARPUs will need to rise substantially for Bharti Airtel to be able to make the AGR dues payments as well as incur necessary capex costs to combat Reliance Jio.

Morgan Stanley has estimated Rs 10,130 crore worth of capex and Rs 3,069 crore in interest costs for 2020-21.

Yet, according to Sharma, under the current scheme of things, the balance sheet and the cash flows are adequate for Bharti Airtel to meet the payments.

The Supreme Court also examined if the operators be made to also pay spectrum dues for the rivals they acquired. The top court, however, referred this to the National Company Law Tribunal.

Bharti Airtel took over spectrum of Videocon Industries Ltd. and Aircel Ltd. Aircel owes Rs 12,289 crore and Videocon Rs 1,376 crore in pending dues.

Morgan Stanley said the operator’s debt-to-Ebitda ratio will marginally deteriorate to 3.8 times if the dues of Videocon and Aircel are included. But the probability of new dues materialising is low, it said.

Bharti Airtel didn't immediately respond to BloombergQuint's emailed queries.

Vodafone Idea

Vodafone Idea owes the DoT more than Rs 50,000 crore, Solicitor General Tushar Mehta told the Supreme Court. The repayment will require tariff increases, additional capital, and cost cuts.

• At an assumed rate of interest of 8% a year on the staggered payments, the company will have to pay Rs 7,511 crore annually and will create an additional interest liability of Rs 24,710 crore over 10 years, according to BloombergQuint's calculation.

• Even if no interest is charged on the staggered payments, the annual payout will be Rs 5,040 crore.

Can It Pay?

Going by the free cash flow estimates by Motilal Oswal for 2020-21 and 2021-22 of Rs 2,500 crore and Rs 3,300 crore, respectively, the operator may face difficulties in repaying the regulatory dues.

A Morgan Stanley report estimates ARPU requirement of Rs 199 for the 10-year repayment term, but doesn’t see that happening in the near term.

The ARPU fell 5.8% quarter-on-quarter in the three months ended June to Rs 114; revenue and Ebitda declined 9.3% and 6%, respectively, according to the operator’s filings.

Sharma of SBICAP Securities said if Reliance Jio was made liable to pay dues for Reliance Communications Ltd., it would have been forced to look at increasing ARPUs. But since that’s out of the equation, ARPU hikes might be difficult.

The fair value for Vodafone, with a staggered payment time frame of 15 years, was around Rs 7 a share, and the brokerage will revise it post the current judgment as the timeline has reduced.

A Motilal Oswal report said Vodafone Idea is seeking to double its ARPU due to its high debt Rs 1,65,900 crore (including statutory dues) and cash flow requirement of Rs 30,000 crore service debt. But increasing tariffs will not be easy as the company is losing its market share, it said.

Also Read: Jio Continues To Erode User Base Of Airtel, Vodafone Idea

The carrier lost 580 basis points share in the quarter ended June, with bulk of the losses coming from the top three markets that contribute 35% of its revenue.

Vodafone Idea didn't immediately respond to BloombergQuint's emailed queries.