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Supreme Court of India. (Photo: Mint)
Supreme Court of India. (Photo: Mint)

What Supreme Court will find in financial statements of telcos

An exercise to ascertain telcos’ capacity to clear AGR dues shows they simply can’t, at least, based on cash from operations

Vodafone Idea Ltd’s shares have nearly tripled since the lockdown started, making it the biggest gainer among the Nifty 500 set of stocks in the past three months. One of the reasons for the optimism is a gradual softening in the Supreme Court’s stand in the adjusted gross revenue (AGR) case, giving rise to hopes about its survival.

In the last hearing, it directed telcos to furnish financial statements of the past 10 years in order to ascertain their financial capacities to clear adjusted gross revenue dues.

Struggle for survival
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Struggle for survival

The picture there, clearly, isn’t pretty. Accumulated losses, cash burn and a nearly non-existent return on capital employed (RoCE) may well cause the court to show some leniency in terms of the repayment period for the dues.

Since Vodafone Idea is yet to announce results for FY20, the 10-year period between FY10 and FY19 has been considered. The merger of Idea Cellular Ltd and Vodafone India Ltd was effective only from 31 August 2018. So, for most part, results of Idea Cellular have been considered.

During the 10-year period, cumulative losses stood at 7,343 crore, most of which occurred in FY18 and FY19. Free cash flow in the period was negative to the extent of 10,164 crore, with cash burn occurring in most years except the FY13-FY15 period.

And as far as RoCE goes, it stood at an extremely poor 6.5% on average even after excluding the loss-making period of FY18 and FY19. For the whole 10-year period, RoCE was nearly non-existent. Return on equity, of course, was negative.

In short, an exercise to ascertain the financial capacity of telcos to clear adjusted gross revenue dues shows they simply can’t, at least, based on cash generated from operations.

In fact, analysts at Emkay Global Financial Services Ltd say Vodafone Idea will struggle to meet payouts even if the court took telcos’ suggestion to stagger the repayment over a 20-year period. “Under all the situations (repayment period of AGR dues over 20, 15 and 10 years), there is sizeable cash burn, which leads to a cumulative cash loss of 25,600 crore, 27,600 crore and 31,900 crore over FY21-23," they wrote in a 19 June note.

Note that from FY23, dues worth about 16,500 crore on account of deferred spectrum payments kick in, and will put considerable pressure on cash flows. To fill the gap in cash flows, Emkay’s analysts say tariff hikes and a large equity infusion will be necessary.

But as Ankit Jain, assistant vice-president-corporate ratings, Icra Ltd, says, there is still a lot of uncertainty on whether the Supreme Court will agree to a long repayment tenure. This option seems contingent on Vodafone Idea making a “reasonable" upfront payment of dues. While Bharti Airtel Ltd has already made an upfront payment amounting to about 41% of dues, Vodafone Idea’s advance payment has been far lesser.

One fallout of this fight for survival is that Vodafone Idea’s competitors are expected to walk away with high market share gains. There is already a wide gap in terms of investments being made, which is likely to worsen given Vodafone Idea’s cash flow predicament due to the AGR dues.

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