Telecom sector which was already running in hot waters, got another blow with the recent judgement by Hon’ble Supreme Court of India on Adjusted Gross Revenue (AGR). The Telecom companies have to pay more than Rs 1.3 lakh crore as additional dues to the Government. The government has set up a committee to consider ways in which the struggling telecom sector can be helped.
However, the apex court of India has asked the Telecom companies to pay their dues immediately without extending the time line. Now the banks are also backing away from funding the telecom companies as their debts are mounting day by day. Even after paying their dues it is not certain whether the telecom companies like Vodafone Idea and Airtel would survive in the market.
Call Drop: Will the payment by Telecos Compensate the Consumers’ Woes!
The three Telecom companies – Bharti Airtel, Vodafone Idea and Reliance Jio have to pay Rs.3.2 crores towards call drop charges for the period between September 2018 and June 2019.
Even if the payment is made to the Government towards the charges, how the ultimate consumers are going to be compensated has not been made clear.
Telecom: Business is Bleeding
The AGR verdict had only added to the woes of the telecom company's bleeding business in India. The Supreme Court's decision regarding the payment of AGR immediately comes as the Telecom companies did not act upon its October 23 judgment. So, unless the Central Government intervenes, there is no way other than paying the dues if the telecom provider wants to continue its business in India. The performance of the 3 companies could bring home the facts:
Revenue Rs.in Crores)
Profit/Loss (Rs. in Crores)
Vodafone Idea & Airtel: Higher Outstanding than Others
Bharti Airtel and Vodafone Idea have suffered greater blows as they have highest outstanding to pay. The Supreme Court decision to telecom companies for failing to comply with its earlier verdict and not paying their adjusted gross revenue (AGR) dues despite being given time has put the telecom companies in an impasse as they find it difficult to adhere to the time line.
The companies had approached the Supreme court seeking a revised timeline to pay the dues. But, the court, instead, said it will initiate contempt proceedings as the companies had not deposited any amount despite its judgement in October directing them to do so. The Telecom companies, including Airtel and Vodafone Idea, owe over Rs 1 lakh crore in past AGR dues and must now pay up according to the court’s directive.
Bharti Airtel: Ready to Pay in Two Instalments
Airtel has written to the department of telecom (DoT) that it would pay Rs 10,000 crore by February 20 and the remaining before March 17. The company in total owes Rs 35,586 crore, including license fees and spectrum usage charge dues.
Bharti Airtel has been raising money to strengthen its balance sheet. In January, it raised $3 billion, which included $2 billion via qualified institutional placement and $1 billion via foreign currency convertible bonds.
Bharti Airtel reported a net loss of Rs 1,035 crore on consolidated revenue of Rs 21,947 crore in third quarter.
Vodafone Idea: Making payment is not Easy
Vodafone Idea while announcing its quarterly earnings, said that it was undertaking a self-assessment exercise for the computation of liability. It is not easy for Vodafone Idea to raise funds as its balance sheet is already week. For the quarter ended December 31, Vodafone Idea reported a net loss of Rs 6,438 crore on revenue of Rs 11,380 crore.
The Supreme Court order puts further uncertainty on operational sustainability of these telecom companies, particularly that of Vodafone Idea. Suman Chowdhury, president, ratings, at Acuite Ratings & Research says "Ability to pay an amount of over Rs 55,000 crore by the stipulated date is uncertain given its current financial flexibility. While Airtel needs to pay Rs 35,500 crore, they have been able to raise funds in the recent past."
Ratings agency CRISIL downgraded Vodafone Idea's non-convertible debentures to BB from BBB-, while maintaining "rating watch with negative implications" on January 24, 2020.
CRISIL has clarified, “Vodafone Idea has made a total provision of Rs 44,150 crore, till the quarter ended September 30, 2019 for the disputed liability towards AGR. The existing liquidity (about Rs 15,390 crore as on September 30) will be insufficient if there is a payout of license fee liability of Rs 27,610 crore."
Vodafone Idea: Seeking Support from Government
Vodafone Idea has said in the past that unless there is some support from the government, it may not be able to survive. According to Vodafone Idea, “Material uncertainty exists that casts significant doubt on the company's ability to continue as a going concern and its ability to generate the cash flow that it needs to settle, or refinance it's liabilities, including those relating to the SC AGR judgement and guarantees as they fall due."
Vodafone Seeking Respite in Payment
Vodafone Idea said that its ability to continue as a going concern will be dependent on a positive outcome of the application for modification of the supplementary order before the Supreme Court and subsequent agreement with department of telecom for the payment in instalments after some moratorium and other reliefs.
Telecom Tariff to Go Up: Subscriber Base may Erode
Telecom firms raised tariffs by up to 40 per cent in December. It is expected that telecom companies can raise tariffs further by at least 20-25 per cent in the near-to-medium term to support the payment of the large dues. Although, higher tariffs will boost earnings of telecom firms, but they will lose the subscriber base especially the Vodafone Idea.
CRISIL report says that Vodafone Idea lost 8.5 crore subscribers over 12 months through November 2019. Its subscriber base declined to 304 million in the third quarter from 311 million in the second quarter. However, average revenue per user has increased to Rs 109 from Rs 107 in the same period.
The prospect of the telecom industry shrinking to two private players plus state-owned BSNL can't be ruled out for now. Even the government has on various occasions admitted that the sector is indeed undergoing stress and needs support. Giving a ray of hope to the telecom companies, the government recently announced setting up of a Committee of Secretaries to examine the financial stress in the sector, and recommend measures to mitigate it.
Adverse Impact on Economy, if Vodafone files Bankruptcy
Vodafone Chief Executive Officer Nick Read had said the situation in India is critical. The British telecom major holds 45.39 per cent stake in Voda-Idea. If Vodafone Idea chooses to go the bankruptcy path and shuts down operations, the impact on Indian economy will be multifold.
The magnitude of debt default, job losses and customer woes will have huge repercussions in the banking and telecom sectors. Country's largest public lender, State Bank of India, has already expressed its concern on the situation and said banks will have to pay the price if any telecom company shuts down.
According to a recent research report by Motilal Oswal Financial Services (MOFSL), Voda-Idea has gross debt of Rs 1.2 trillion, of which around Rs 900 billion is government’s deferred spectrum debt, while around Rs 250 billion is bank debt.
Voda-Idea has 13,500 employees, in addition to multiple vendors and other stakeholders. Hence, payment defaults can have a direct impact on the Indian economy.
The Vodafone-Idea would find it difficult to service debt and capex needs through its operating cash flow and therefore needs Government support for survival.
Expected gain for Airtel
Vodafone Idea's loss might prove to be Airtel's gain in the long run. Vodafone Idea has already had a huge erosion in terms of subscribers over the recent months. This will stand to increase in the forthcoming days of uncertainty, which will, in turn, be positive for Airtel
Other factors affecting adversely the growth of Telecom sector are:
Lacklustre Telecom market conditions: It is tough to remain a going concern if there is no change in order, while there is limited room for any change in decision either by government or any other SC bench
High Fees & Taxes: Determined and stable policy with moderate tax structure can revise the Telecom market. High fees, frequent policy flip-flops, endless tax demands have repeatedly failed telecom sector especially Vodafone ever since its debut in India.
Leading to Duopoly Telecom Market: It is unlikely that Vodafone will invest more in its India market nor its partner, Idea's parent company, Aditya Birla would invest. As a result, India's telecom sector is headed towards a duopoly market, with Reliance Jio and Airtel consolidating the market, with state-run BSNL at a distant third place.
How to Revive Telecom Sector
- Telecom Regulatory Authority of India (TRAI) is examining the merits of a “minimum charge” that operators may charge for voice and data services
- Increase in Tariffs for various services
- Stopping the Rivalry between Reliance Jio and the two older operators, Airtel and Vodafone Idea is required
All the hopes of the industry are now pinned on measures the government announces as part of the relief package for the Telecom sector.