The telecom industry may be headed towards a duopoly in case Vodafone Idea is unable to clear its AGR dues
Investors in the Vodafone Idea Ltd (VIL) stock were hoping against hope that the Supreme Court (SC) would provide relief on the matter of payments related to the adjusted gross revenue (AGR) case. In its interim judgment, the SC rejected the petition filed by telecom firms such as Bharti Airtel Ltd and Vodafone Idea requesting its direction for a correction of alleged errors in the calculation of AGR.
Shares of VIL fell over 9% on the NSE on Friday, reacting to this development. The verdict is a severe blow to cash-strapped VIL, which owes around ₹61,000 crore in AGR dues to the government. Unless the company manages to raise funds, it is feared that the Indian telecom industry could be headed towards a duopoly.
“The judgment is sentimentally negative for Vodafone Idea. There could have been expectations that any positive outcome on this matter could give the company much-needed breathing room," said an analyst with a domestic brokerage requesting anonymity. He added that the outlook for Vodafone Idea remains bleak unless it manages to raise around ₹25,000-30,000 crore, which needs to be followed by a tariff hike. “We don’t expect either of these to happen anytime soon, so we retain our negative view on the stock," he said.
In FY21, Vodafone Idea’s net debt stood at ₹1.8 trillion, with a cash balance of a mere ₹350 crore. The fact that net debt increased shows the firm continues to burn cash.
“Our workings indicate that VIL needs to double its ARPU to service its debt in FY22E/FY23E, assuming no further subscriber churn," analysts at Motilal Oswal Financial Services Ltd said in a report on 5 July. ARPU is short for average revenue per user.
Earlier last week, Airtel announced an increase in its corporate postpaid tariffs, but left prepaid tariffs untouched.
“The lack of hikes in the retail postpaid or prepaid segment indicates to us that its primary focus still is on subscriber market share," said analysts at Jefferies India Pvt. Ltd.
In September last year, the apex court had granted telecom firms 10 years to clear their AGR dues to the central government. The telecom providers were asked to shell out a payment of around 10% of the dues every year.
Companies had to pay their first instalment on 31 March 2021. However, a dispute has emerged regarding the AGR calculation done by the department of telecom. Meanwhile, Vodafone Idea has also written to the government to either extend the moratorium on spectrum payments or come up with a floor-pricing mechanism to fix the sector’s pricing issues.
Analysts say it is difficult to turn constructive on the stock unless its liquidity woes are resolved.