Airtel and Voda-Idea remain risky bets

While the two stocks have witnessed a relief rally, their fundamentals remain worrisome

Policymakers have come to the unsurprising conclusion that the telecom sector is too big to fail. Airtel and Vodafone Idea would cease to be going concerns if they had to fork out a combined Rs 83,000 crore in Adjusted Gross Revenue (AGR) by January 2020. That would lead to the sector becoming a monopoly. It would also leave some 700 million subscribers in the lurch. Hence, the payment schedule for the outstanding AGR has been deferred. 

All three private operators are likely to hike tariffs in December. The long-awaited 5G spectrum auctions are quite likely to be delayed further. There will also be a bailout of BSNL and MTNL. This might not make a material difference to the PSUs. They are massively overstaffed and likely to continue bleeding. 

The two-year respite on payment of AGR dues (along with spectrum charges and interest, this will amount to more than Rs 83,000 crore) gives Airtel and Vodafone some time to pull things around. Neither operator has the free cash flows to service this outstanding amount comfortably. 

Airtel’s consolidated full-year 2018-19 revenues were Rs 80,780 crore, with Ebitda before Exceptional Items at Rs 26,293 crore. The merged Vodafone-Idea is likely to hit revenues in the range of Rs 45,000 crore for 2019-20. The competition remains fierce. It is hard to see a situation where the two operators will generate enough cash in the next two years to service AGR demands. 

So, both will have to find the cash elsewhere and lobby for more policy relief by April 2022. Airtel may find the cash, but it won’t be easy. Vodafone has written down the business value of its India operations to zero. The Kumar Mangalam Birla group is also not very happy at the thought of coming up with more funds. Given that the promoters are unwilling to invest in the company, will they be able to persuade somebody else? 

There have been relief rallies in both these stocks. This has been great for traders who were prepared to act quickly and to live with very high volatility and exploit swings driven by news and wild rumours. But the long-term situation remains worrying for these two corporates, and for the sector as a whole. 

Reliance Jio (RJIL) is better placed than Airtel and Vodafone-Idea. RJIL has far lower outstandings. It is technically profitable, though it is still cash-negative. The parent, Reliance Industries (RIL), has a vast, reasonably healthy balance sheet, and it can easily raise any cash necessary. However, RIL is clearly looking to deleverage RJIL, which has over Rs 2 trillion in debt. It is spinning off assets. 

Sooner or later, RJIL will be spun off in an IPO. The valuation is imponderable at the moment. The telecom sector’s dynamics could change significantly by the time the IPO is launched. At the moment, any investor who’s interested in Jio can only take a position in RIL. That implies buying into diverse sectors such as refining, petrochemicals and retail, as well as into telecom. 

Long-term investors would be taking huge risks if they increased their exposure in Vodafone-Idea and Airtel. The only rationale for buying into these two corporates right now would be gambling on further policy relief in the long-term. That is, of course, possible. But it depends on the estimate of political alignments and upon guessing whether the affected corporates can lobby effectively enough to persuade the government to offer more relief. 

Judging whether this would happen is tricky. There are several reasons why it may occur. One is the sentimental impact of yet another MNC (Vodafone) leaving the Indian telecom sector. Another is the huge subscriber base of Voda-Idea and Airtel, which combined amounts to over 700 million subscribers. If the companies collapse, those subscribers will have to be ported out, or else there would be a huge political backlash if 700 million connections stop working. So, it is in the interest of the political establishment to ensure that the companies don’t collapse. 

 In a broader sense, what has happened in the telecom sector has negative repercussions for the economy. The sector has strong externalities. A healthy telecom sector supports every other sector and enables economic activity and growth. A weak telecom sector where the players are struggling to stay afloat implies negative externalities across the board.