As far as corporate mortality rates go, India’s telecom sector has been particularly brutal to its participants over the past decade.
Once home to a cacophony of over 15 private telecom service providers (TSP) vying for a promising market, high taxation and adverse regulatory developments followed by a no-holds-barred tariff war with new entrant Reliance Jio has reduced the number of incumbents to just two: Bharti Airtel and Vodafone Idea (VIL).
And now, with the Supreme Court ordering TSPs to pay up Rs 92,640 crore in pending dues to the government within three months, the country’s largest player by subscriber base -- VIL -- may well become the latest to book space in an already crowded cemetery of bankrupt and defunct telcos.
As for Bharti Airtel, while the thousands of crores in new liabilities is unlikely to place it under risk of insolvency, the added burden would sharply reduce fiscal space for future investments.
At stake are nearly Rs 1.40 lakh crore of debt exposure to banks and mutual funds, of which VIL alone accounts for nearly Rs 1 lakh crore according to sources, and around 40,000 direct and indirect jobs.
Financial results for the second quarter released on Thursday by the two incumbents only underscore the gravity of the situation, with mammoth provisions for liabilities arising from the SC order leading to all-time record losses.
While Bharti Airtel posted its high quarterly loss since inception at Rs 23,450 crore, VIL’s consolidated net loss of Rs 50,922 crore was the worst financial performance by any Indian firm in history.
Govt intervention vital for Vodafone Idea survival
The telecom sector has long complained about being under one of the most onerous taxation regimes in the world, but the immediate trigger for the current crisis has been the SC’s verdict on a 14-year old legal battle between the Union government’s Department of Telecom (DoT) and TSPs over the definition of adjusted gross revenue (AGR) on which license fees and spectrum usage charges are calculated.
With the SC finding in favour of the government’s stance that AGR should include non-telecom receipts of TSPs, the companies have been confronted with a Rs 92,640 crore bill where the principal amount is only Rs 23,189 crore, but interest and penalties calculated over the fourteen years of litigation stand at a whopping Rs 69,451 crore.
The huge liabilities have prompted both companies to red-flag their ability to continue as going concerns and state that they will file a review petition with the SC on the AGR order. VIL, in particular, has minced no words on the importance of government relief, stating that its “ability to continue as a going concern is dependent on obtaining reliefs from government and a positive outcome for the proposed legal remedy”.
VIL’s cash balance as at the end of September stands at just Rs 15,390 crore, against its estimated liability of Rs 44,130 crore toward dues.
The huge provisions have also led to a sharp fall 70 per cent fall in its net worth to around Rs 24,000 crore compared to the end of June this year, even as its net debt rose by 7 per cent to Rs 1.07 lakh crore.
Consequently, its net debt to equity ratio has soared to 4.5 times at the end of September against 1.24 times as of June-end.
With Vodafone Group Plc writing off its investment in VIL and reports claiming that its other promoter Aditya Birla Group is not inclined to invest more capital, analysts are uncertain where the group will find the funds to service its obligations without government support.
Friday’s stock price movement for VIL also buttresses arguments that government support is crucial for the company.
While the stock fell up to 19 per cent in early trade, unconfirmed reports that swift government relief was in the offing saw stock soar, ending the day up by 24.75 per cent.
VIL’s pain is Airtel, Jio’s gain
As severely impacted as its fellow incumbent in terms of AGR dues, Airtel nevertheless is placed in a far superior position, analysts note, especially since its operational metrics have continued to improve. “We believe, the AGR order impacts Vodafone Idea the most, impairing its ability to invest in the network. This will provide Bharti an opportunity to boost market share, driving profitability,” noted Edelweiss Securities.
Emkay Global, in fact, believes that Airtel and Jio are likely to mop up most of VIL’s subscribers and a two-horse market, not including BSNL-MTNL, would provide ample space for growth.
“The AGR penalty will undoubtedly impact the company’s balance sheet and borrowing costs. Given the quantum of the penalty, Bharti will have to raise capital to keep leverage under check,” it said, but went on to point out that given the weakening financial viability of VIL, “Bharti will gain 40 per cent of VIL’s revenues/subscribers, while JIO might garner a higher share of 60 per cent”.
“Eventually, two large players controlling the telecom market with Jio’s aspiration to become the dominant player will drive tariff increases, which we anticipate from FY22 after a consolidation in FY21,” Emkay concluded.
In fact, despite its Rs 28,450 crore net loss, Airtel shares began rising on Friday from the get-go, eventually closing just shy of its 52 week high at Rs 393.20 per share. “Bharti is the only telco to have nil operational cash loss in Q2FY20,” said ICICI Securities, “and we see this as an advantage over the longer term.”
Some form of government relief seems likely
While the AGR verdict has become the immediate trigger for the current crisis, the telecom industry says that its troubles have been simmering for nearly a decade.
“The present problems probably can be pinpointed to issues that go as far ago as the beginning of the 2G spectrum issue in 2008, after which the SC directed that all spectrum be auctioned,” noted Rajan Mathews, director-general of the Cellular Operators Association of India (COAI).
However, with the spectrum licenses coming to an end, the telcos were expected to re-bid for the airwaves under the auction mechanism.
Bidding for the so-called “survival spectrum” at very high rates led to a significant increase in debt. “This may be seen as the genesis of the current debt problems in the industry,” Mathews noted.
Gross telecom sector debt is currently estimated at over Rs 7 lakh crore.
Even as spectrum began being auctioned, the government also continued with the earlier revenue sharing system, which became a “double whammy”.
“The combination of these factors were the genesis of these troubles. And then came the entry of Reliance Jio, which hit the revenue stream and sent tariffs plunging,” Mathews pointed out.
High levies, especially in the form of spectrum usage and license fees have always been a matter of contention between policymakers and TSPs.
In fact, industry executives say that for every Rs 100 in revenues, the sector pays nearly Rs 30 to the government in various levies.
As per the current taxation regime, on top of upfront spectrum fees, TSPs are mandated to pay 3-5 per cent of AGR as spectrum usage charges and up to 8 per cent of AGR as license fee, making the sector which provides one of the cheapest retail rates to customers in the world also one of the most heavily taxed.
However, the implications of the AGR judgement and the possibility of a duopoly or even a monopoly in the market has forced the Centre to begin examining relief measures.
A Committee of Secretaries headed by Cabinet Secretary Rajiv Gauba is currently examining ways to reduce the burden on TSPs.
“Given the stretched balance sheet of telcos, we believe that government can be sympathetic to operators. If so, it will likely be in the form of deferred payments (annual instalments over a period with a moratorium in near term).
A panel is already reviewing other relief measures relating to moratorium on spectrum dues and license fee and this will likely be considered along with the same,” analysts at global brokerage Jefferies wrote in a report.
The CoS is expected to arrive at its recommendations soon, with several meetings already held between policymakers, the panel and stakeholders.
For Vodafone Idea, at least, the panel’s recommendations and subsequent government action are likely to spell the difference between a fighting chance at recovery and an ignominious collapse.