Why AGR Verdict Is Bad For Vodafone Idea And Could Bring Duopoly In Telecom

On Tuesday, the Supreme Court gave telecom operators 10 years to clear their AGR (adjusted gross revenue) payments in a staggered manner with an upfront payment of 10 percent by 31 March 2021.

Shares of Vodafone Idea plunged as much as 17 percent after the verdict and Bharti Airtel rose over 6 percent.

The timeline provided for payment is shorter than the 20-year period sought by the central government and 15-year requested by both Vodafone Idea and Bharti Airtel.

The apex court has ordered the telcos to pay dues for each year by 7 February of the year or face contempt proceedings along with penalty in case of default in payment of annual installment.

Analysts feel that the verdict will gravely affect Vodafone Idea, the financially weak telco, and could even cause it to close shop. The company had itself expressed concerns over liquidation if it would have to pay dues in one go.

An estimate reported by Mint says that Vodafone Idea will have to pay Rs 7,853 crore in annual installments, on an average, at 9 percent interest. According to an analyst from Fitch Ratings quoted by CNBC-TV18, the telco's EBITDA is insufficient to even pay interest expenses of its estimated $700-800 million a year. The company also requires to incurr expenses on infrastructure and existing spectrum in the upcoming auction. Vodafone Idea will need an average revenue per user (ARPU) of Rs 300 to survive, which is more than double of the current Rs 114, Fitch Ratings said.

Vodafone Idea has the weakest balance sheet among the top telecom players. For the June-ended quarter, it reported a massive loss of Rs 25,460 crore due to exceptional costs, including Rs 19,440 crore related to total estimated AGR dues to the government, Rs 123 crore as a one-time spectrum charge and Rs 370 crore for integration and merger costs amounting to a total provision of Rs 19,923 crore.

If the company liquidates, the telecom sector will be dominated by two players- Reliance Jio and Bharti Airtel- making it a duopoly.

Vodafone Idea has so far paid Rs 7,854 crore in AGR dues and had a cash holding of about Rs 3,450 crore as of 30 June. Gross debt (excluding lease liabilities) as of June was Rs 1.18 lakh crore, including deferred spectrum charges of Rs 92,270 crore.

The telco's attempt to monetise its 11.15 percent stake in Indus Towers after its merger with Bharti Infratel is underway, with the Bharti Infratel board approving the merger deal on Monday. Vodafone Idea is expected to receive approximately Rs 4,040 crore from the stake sale and has agreed to make a prepayment of Rs 2,400 crore to the merged tower entity from the cash consideration to be received from Infratel at the time of closing.