10 years to pay AGR dues: Will it be enough to keep Vodafone Idea afloat?

The Supreme Court’s decision to allow 10 years to pay AGR dues will prevent Vodafone Idea from shutting down immediately, but it will have to do multiple things to stay alive in a highly competitive telecom market.

Vodafone Idea has to pay ₹53,000 crore to the Centre, which means it will have to fork out over ₹5,000 crore a year just to pay past AGR dues. In addition, the operator will have to fund its current payments towards licence fees, spectrum usage charges, besides capital expenditure towards network roll out. The operator’s balance sheet will be highly leveraged to make fresh investments into network roll-out or acquiring fresh spectrum.

It is expected that the Centre will hold 5G spectrum auction sometime next year and, going by the existing reserve price for the airwaves, Vodafone Idea may find it difficult to participate in a bidding process in view of the already large debt on its books.

Ringing in tougher times

“The Supreme Court order means that Vodafone Idea will not die now but if it wants to survive in the long term, it will have to increase tariffs immediately. No where in the world you would get 15-16 GB data for just $2 a month. This will have to increase to at least $7 a month. Airtel has already said it wants to increase tariffs and Reliance Jio, with a zero debt balance sheet, would focus on delivering better customer experience instead of competing on pricing,” said Sanjay Kapoor, former CEO of Airtel.

Material impact

With the AGR outflows likely to have a material impact on cashflows of telcos, analysts at Jefferies equity research expect a minimum 10 per cent tariff hike in the near term. “Assuming an incremental EBITDA margin of 65 per cent, to completely offset the impact of AGR dues, Bharti Airtel will have to increase ARPUs by 10 per cent and Vodafone Idea by 27 per cent,” analysts at Jefferies said.

Other analysts said that to get to cash flow breakeven through price increases requires Vodafone Idea to triple its EBITDA. To achieve this through price alone would require an average revenue per user of ₹275 compared to ₹114 now. “This would require complete focus on execution. Customer experience and services will have to be the prime driver. Vodafone Idea could stop servicing low paying customers altogether even if that means losing subscriber market share,” said an industry expert.

Vodafone Idea’s revenue market share has dipped sharply to 21 per cent during the June quarter, nearly half of what it was in FY17. Market share shifts continued towards Reliance Jio and Bharti Airtel with both operators gaining 470 basis points (bps) and 200 bps market share versus their FY20 levels to 38 per cent and 33 per cent, respectively. Vodafone Idea’s revenue market share losses are no longer just being driven by its weaker markets. During Q1, 60 per cent of Vodafone Idea’s 5.8 percentage point (ppt) market share loss came from its top-3 markets that form 35 per cent of its revenues.

According to Kapoor, Vodafone Idea could also sell equity stake to a financially strong investor. “There could be investors interested in putting money into Vodafone Idea given that the company has a lot of value,” Kapoor said.

Sonam Chandwani, Managing Partner at KS Legal & Associates, said: “Payment tenure of 10 years would pose as a grave challenge for debt-ridden Vodafone Idea as the repayment of such expenditure would require higher tariffs, cost savings, and an equity capital infusion. Also, most financial institutions are likely to refrain from lending large amounts of money to VIL.”

The impact of the apex court order on other telecom operators will be less critical. Bharti Airtel will have to pay ₹2,600 crore upfront and an annual payment of ₹3,500 crore. Reliance Jio being a new player has to pay just about ₹200 crore, which it has already deposited. The Supreme Court has asked NCLT to take a decision on the companies which under insolvency. The key question here is whether spectrum owned by these companies can be sold through the insolvency process. This could have an impact on Reliance Jio depending on how the NCLT views the issue.

Ankit Jain, Assistant Vice-President, Corporate Ratings, ICRA, said, “The proposed payment pattern adds to the burden of the industry which was already saddled with elevated debt levels. This will also exert pressure on the cash-flows and leaves limited room for network capex and expansion, especially for the relatively weaker player.”

Ravi Sharma, Chairman, Telecom Equipment Manufacturers Association, said the judgment offers only a band-aid solution. “This adverse judgment will definitely hamper the growth of telecom sector and the level playing field.”

TEMA also believes that the issue of spectrum trading by company facing insolvency should be decided by Supreme Court rather than NCLT.