Analysts estimate cash flow relief worth about ₹24,000 crore per year for Vodafone Idea, owing to the moratorium on AGR and spectrum. The same for Bharti stands at around ₹12,000 crore per year
Is the Indian telecom sector headed towards a duopoly? For some time, investors in telecom stocks were losing sleep over this ₹1.9 trillion question, the mammoth amount being Vodafone Idea Ltd’s net debt as of 30 June.
Thanks to the government’s relief package announced last week, the short answer to this is: not for the next four years, at least. A key measure here is the moratorium on AGR (adjusted gross revenue) and spectrum dues for up to four years. This is expected to bring meaningful relief to Vodafone Idea’s cash flow situation, giving it a breather.
The Street has displayed fireworks already. By around mid-August, fading hopes of survival had led to a massive correction of nearly 50% in Vodafone Idea’s shares since the beginning of this calendar year. But with the company emerging as the key beneficiary of the package, the stock has recouped most of this loss. Last week alone, Vodafone Idea’s stock surged 33%. Shares of Indus Towers Ltd, of which Vodafone Idea is one of the biggest customers, joined the party, rising 11% last week as investors took note of the telco’s reduced going concern risk. Close rival Bharti Airtel Ltd’s stock hit a new 52-week high of ₹737 on Thursday on the National Stock Exchange.
Analysts estimate cash flow relief worth about ₹24,000 crore per year for Vodafone Idea, owing to the moratorium on AGR and spectrum. The same for Bharti stands at around ₹12,000 crore per year.
It’s worth noting here that Vodafone Idea’s enormous debt burden doesn’t reduce. “These measures may allow it to continue as a going concern, but the absence of relief on the balance sheet or P&L may rule out any meaningful equity value creation," said analysts from Kotak Institutional Equities in a report on 16 September. The broker said, “Moreover, it may continue to lose users as it remains behind Bharti and (Reliance) Jio on network capabilities (4G/5G) and service offerings (subsidized handsets, bundled plans, etc.)."
Other relief steps announced include simplification of AGR definition, ease of spectrum sharing and 100% FDI under automatic route permitted in telecom sector from 49% earlier.
To be sure, the package isn’t enough in isolation. Kunal Vora, an analyst at BNP Paribas India, said, “The government’s measures are just one part of the solution." Tariff hikes are the need of the hour. “While the sector continues to need tariff hikes, with government support coming in, the urgency has reduced," Vora said.
For the time being, firms seem to have dodged the tariff hike bullet. “Though indirectly, we believe the moratorium also gives some operational headway for Jio to focus on subscriber acquisition without having to worry about a regulator nudge to raise tariffs (given Vodafone Idea can survive without any tariff hike for 2-3 years), which could have otherwise impacted its subscriber acquisition as well as plans to upgrade industry 2G users to Jio’s network using Jiophone/Jiophone Next," point out analysts from JM Financial Institutional Securities Ltd.
That said, investors should note that despite the deferment of dues, the government has protected the net present value (NPV) of dues. In other words, the impact on the government’s revenues will be neutral.
For Vodafone Idea, notwithstanding the medium-term respite, the journey ahead is patchy. In the past two years, Vodafone Idea’s revenue market share has eroded to 22% from 33%. “To stem this, it needs to invest in its network. Protecting market share and a tariff hike will be essential to improve free cash flow generation," said a report from BNP Paribas. Investors will also watch if the company can raise funds that can be deployed in the network.
Moreover, the option to convert the total deferred amount to equity by the government could pave the way for Vodafone Idea to become a public sector unit. This would entail significant equity dilution and, therefore, isn’t desirable for its investors. As such, clarity and steps on conversion of interest on deferred payments into equity need to be watched. This may also potentially dull the equity-raising prospects from other investors.
On the other hand, some analysts expect Bharti to gain market share. “While we maintain our estimates, we raise our price target to ₹850 per share on higher multiples for India mobile and non-mobile businesses," said analysts from Jefferies India Pvt. Ltd in a report on 16 September. On Friday, Bharti’s stock closed at ₹728.
Be that as it may, some believe the government’s steps only postpone the sector’s troubles. JM Financial’s analysts said, “The current reforms only address the liquidity stress in the sector and does not solve the elevated leverage levels in the sector (though it prevents a future flare-up of leverage through measures such as the ability to surrender spectrum), with the crisis being postponed to FY26-27."
As such, telcos’ demands for introducing floor tariffs and a cut in regulatory levies have not been addressed. Yes, the package ensures three private companies in the industry, but risks continue to loom. A pertinent question then is whether duopoly is still in play. Jefferies says, “Yes, it is, but a bit delayed." For now, it appears the can has been kicked down the road, and what’s more, the stock market isn’t complaining.
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