AGR verdict: Clock ticking for a 2-horse race and a boost to Reliance Jio

Thursday’s Supreme Court order could hasten the process of the departure of another private telecom player, reducing the number to just two. It will also give a big boost to Reliance Jio, which has to pay a minuscule amount compared to its two key rivals, making it easier for them to achieve their targets. 

The verdict will also provide a relief to the government, which is reeling under the problem of controlling its fiscal deficit with some extra revenue. The extent of reprieve will, however, depend on the time frame, in which the telcos have to pay the amount, and if the government is ready to provide financial concessions to the telcos in paying their dues to the government, including a moratorium on payment of spectrum for two years. 

The seriousness of the impact can be gauged from the fact that the total revenues of the industry last financial year were around Rs 261,991 crore, but the adjusted gross revenue (AGR) was Rs 180,728 crore, and the Ebitda only Rs 53, 953 crore, which is half of what they have to pay out due to the SC order. This does not include the interest payment burden on a debt of over Rs 4 trillion on the books of the current telecom players. 

Vodafone India (VIL), which has to fork out the highest amount of over Rs 28,308 crore (which does not include spectrum usage charges it has to pay), faces a serious financial challenge. This was reflected in the fact that the company’s shares on Thursday fell steeply by 26.55 per cent and its market cap went down to Rs 12,300 crore, which is more than half of what it has to fork out by the SC order. 

The company, based on an ICICI Securities report, has provisioned only Rs 10,771 crore for demands from DoT, which includes AGR on its FY19 balance sheet, which is a third of what it has to pay. With a heavy gearing of 20X of Ebitda, despite the infusion of funds through a rights issue of Rs 250 billion, J M Financial, in its report during Q1FY 20 result, had projected that together with sale of its Indus Towers stake ‘the business could be funded till June-July 2020”. It had also pointed out that fibre monetisation could help them ensure funding till December 2020. 

But with the new SC order, the company might have to raise more equity once again, or sell its assets faster. The question is whether the promoters would still find the business future attractive, especially when it is losing subscribers in droves and is in a loss, and put in more money. 

 The move will also put more pressure on the financials of Bharti Airtel, but Bank of America Merril Lynch gives a buy option for the telco, saying that a weaker third player is positive for competition perspective for Airtel, as it could lead to a faster-than-expected increase in its revenue market share.

Airtel has factored a contingent liability of Rs 6,000 crore, which is only part of its total liability of Rs 21,000 (excluding SUC) on the case; one reason why the share price fell and recovered later on.  

The big beneficiary will be Reliance Jio, which has to pay just over Rs 13 crore (excludes SUC). It would take advantage of the pressures, which the two incumbent operators will be facing, to aggressively woo customers to its fold so that it can achieve its target — acquire 500 million customers from 350 million now.