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Impact of SC AGR Verdict on Indian Telecom Sector: Will Vodafone Idea, Airtel and Others Be Able to Sail Through?

Sep 3, 2020 6:06 AM 4 min read

The Indian telecom space has been a bustling one of late - filled with tales of competition, controversies, accusations, resounding success and crashing failure.

A sector that used to be relegated to the corners is now making headlines. And at the forefront is the adjusted gross revenue (AGR) case - which is being closely watched by experts, investors and laymen alike, given its far reaching implications on the telecommunications sector.

In the latest development in the AGR case, the Supreme Court yesterday gave telecom companies 10 years (from April 1st 2021 to March 31st 2031) to repay their outstanding AGR dues, which include interest and penalties on top of the spectrum charges and license fees. The court also said no revaluation of AGR dues would be allowed.

Today, we dig into what the fuss is all about.



The Phantom of the SC AGR Verdict

The AGR controversy has been playing out for nearly 15 years now. Read our previous Deep Dive on the Indian Telecom sector here to see how the saga has played out. 

The issue first re-surfaced last year in October 2019, when the SC in its judgement said that the definition of AGR includes all revenues as announced by the Department of Telecommunications (DoT).

The telecom companies' liabilities, including interest and penalties, was estimated at c. ₹1.3trn ($17bn). Of this, Airtel AGR dues stood at c. ₹40,000cr ($5.5bn), while Vodafone Idea AGR dues were pegged at c. ₹53,000cr ($7.3bn).

Dues for insolvent companies were also identified and as per the assessment, the now-bankrupt telcos had dues worth ₹40,000cr ($5.5bn) - Reliance Communications owes ₹25,199cr ($3.4bn), Aircel ₹12,289cr ($1.6bn) and Videocon ₹1,376cr ($188m). 

FYI: Vodafone Idea has already paid a part of its AGR dues and has ₹50,399cr ($6.9bn) pending, while Airtel’s outstanding amount is estimated at ₹25,976cr ($3.6bn).

Interestingly, however, as per a self-assessment of AGR dues by telecom companies, they owed the Government much lesser than what it had demanded. For instance, Bharti Airtel pegged the AGR dues it owed the Government at ₹13,000cr ($1.8bn) and did not see them exceeding ₹18,000cr ($2.5bn) - a far cry from the Government’s ₹40,000cr ($5.6bn) estimate. 

It was widely expected that several companies could file for bankruptcy considering the huge amounts they owe. 

After much back and forth, earlier this year in March, a three-judge bench of the SC held that no further objections would be allowed against payable dues of telecom companies. Additionally, it said that no self-assessment by the companies themselves would be entertained.



Impact of SC AGR Verdict on Indian Telecom Sector: Will Vodafone Idea, Airtel and Others Be Able to Sail Through?


Why Should I Be Bothered?

Well while all this seems like a industry-level drama, removed from our existence, it does have a bearing on us consumers.

Telcos have increased data tariffs on consumers to meet the excess debt burden, and Vodafone has warned that it may be forced to terminate its India business altogether.

Given these ramifications, we thought it would be worthwhile to have a closer look at yesterday’s judgement.


The Painful Road Ahead for Indian Telecom Companies

Now while the SC has granted 10 years to pay the outstanding dues, it has directed telcos to pay 10% of the AGR dues upfront.

And Vodafone Idea, with the biggest share of the dues, stands to be impacted the most. 

Vodafone Idea will have to pay ₹5,000cr ($685m) upfront possibly by FY22, post which it will have to pay ₹6,800cr ($932m) annually from FY22. Bharti Airtel, on the other hand, will have to pay  ₹2,600cr ($536m) upfront and an annual payment of ₹3,500cr ($479m).

And as per financial services company, Jefferies, the verdict will fuel further consolidation within the sector.

“A period of 15-20 years would have been an ideal outcome for Vodafone Idea. They will need a combination of equity funding and tariff hike to sail through these regulatory woes,” said Rajiv Sharma, Head of Research at SBICAP Securities.

Towards this effect, Vodafone Idea is set to hold a board meeting on September 4th to consider raising fresh funds - not only meet its payment obligation but also fund its expenditure towards network expansion.

While Vodafone Idea currently has an annualised Ebitda of ₹6,100cr ($836m), which is expected to increase to ₹10,000cr ($1.3bn) after certain additional cost synergies fall in place, it still falls short of what is needed to repay the dues. 

The fact that Vodafone Idea’s customer base fell by 4.7m to 309.9m users in May, is no consolation either. 

Tariffs need to rise by 27% for Vodafone Idea to offset the impact of AGR dues, according to analysts at Jefferies. Considering that the last tariff hike was about nine months ago, another hike may be soon due.

Given the fact that Vodafone Idea is still playing catch-up with Reliance Jio and Bharti Airtel when it comes to 4G network roll-out, the expected 5G spectrum auction next year will only further burden its balance sheet. Will Vodafone Idea be able to weather through or will it crumble under the pressure? Will the AGR verdict pave way for a duopoly in the Indian telecom sector? The saga continues.


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