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Court Throws Spanner In The Works: Telecom Stocks Worst Hit Over AGR Issue

Author: Kumar Shankar Roy/Wednesday, March 25, 2020/Categories: Exclusive

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Court Throws Spanner In The Works: Telecom Stocks Worst Hit Over AGR Issue

It was all set. Indian telecom companies had self-assessed government dues. A massive relief package for telecom companies was being readied that would include an extension of the time-frame to pay dues on adjusted gross revenue (AGR) that the firms owe to the government. But the Supreme Court wasn’t ready to play the ball yet. The Supreme Court on March 18 launched an unprecedented tongue-lashing at mobile phone operators for self-assessing their outstanding telecom dues, saying the action was a clear violation of its rulings on the matter. Hearing the Department of Telecommunications (DoT) plea on the AGR case, a Bench of the Supreme Court of India has held that no further objections to its orders would be allowed against payable dues. This has thrown a spanner in the works for telecom stocks. Let us know about this developing situation in detail.

Sticking to its AGR liability guns

The Supreme Court (SC) has ruled out any reassessment or self-assessment of AGR liabilities, stating that it would tantamount to fraud on the court and contempt of its orders. Moreover, it maintained that operators will have to pay their full dues. It also lashed out on the DoT officers and telecom managements for not complying with the order and warned of contempt proceedings. The only relief is that the apex court has agreed to consider in the next hearing after two weeks the government’s plea on allowing the affected telecos to stagger their payments over 20 years. However, it is yet unclear whether or not it would accept 20 years as the reasonable time for staggered payment.

In its order, the three-judge Bench-led by Justice Mishra, and comprising Justices S Abdul Nazeer and MR Shah, has held that no self-assessment can be done and no further objection would be entertained.
“All dues as per our judgment will have to be paid, including interest and penalty. The Solicitor General had filed a plea seeking reasonable time, we will consider this plea on the next date,” the order stated, media reports said.

After raising demand notice for an immediate payment of complete AGR liability last month, the DoT had reversed its stand, (a) requesting that telecom companies be allowed to spread payment of dues over 20 years and (b) accepting plea for self-assessment of AGR dues.

“In our view, this highlights that the DoT has taken cognizance of the large scale consequences given the size of payment against the stretched balance sheets of telcos. The DoT can potentially offer relief toward annual license and SUC (spectrum usage charge) of total 11 per cent to ease the regulatory burden and also support a floor tariff to improve profitability. However, it is unclear if the government may reduce its receipts to support the bleeding sector,” says Motilal Oswal Research.

Vodafone Idea and Bharti Airtel, two of India’s top three carriers, owe the bulk of the government dues. Bharti Airtel said it has paid Rs 13,000 crore as AGR dues, though it is less than half of the company’s liability as estimated by the DoT. Vodafone Idea has so far paid Rs 3,500 crore out of the ‘self-assessed’ liability of Rs21,533 crore it estimates it owes, but much lower than the government demand.

In October 2019, the top court upheld the DoT’s new definition of AGR and has ordered telecos to clear total dues of Rs 1.47 lakh crore.

Fait accompli for telecom stocks

On expectations of a telecom package, the sector’s stocks had run up quite a bit. With the Supreme Court in no mood to oblige, speculative positions created in telecom stocks started getting unwound. In the two week period, Bharti Airtel has lost 12 per cent till March 20. Tata Teleservices has lost 19 per cent. Reliance Communications shed 10 per cent. MTNL corrected 16 per cent. Vodafone Idea corrected the least at about four per cent. Of course, the telecom package disappointment wasn’t the only reason for a sell-off.
Heightened risk aversion has been an important factor in the bear maul on telecom stocks. But the telecom stand-off isn’t helping telecom stocks. As things stand now, companies may be required to go back to the drawing board in terms of forking out cash for the government dues. According to various estimates, Vodafone Idea needs about 40 per cent average revenue per user increase to achieve EBITDA of Rs 30,000 crore in order to bridge the gap in FY22 against cash requirement toward (a) Rs 16,500 crore deferred spectrum liability, (b) Rs 5,200 crore annual AGR payment, (c) cash interest cost of Rs 3,000 crore and (d) capex of Rs 5,000 crore. Vodafone Idea is the weakest amongst the three leading telecos. It has a stressed balance sheet and without outside help will find it difficult to pay such a large magnitude of liability in such a short period.
Bharti Airtel and Reliance Jio have fewer problems to deal with. Bharti Airtel prepared itself with a plan-B by raising Rs 21,500 crore in January 2020 by way of QIP and FCCB issues, while additional upto Rs 6,000 crore could be generated through FCF. The rest could be funded by bank loans. Similarly, Reliance Jio after its recent capital reorganization is well placed with net debt of much lower levels.

After becoming the largest telecom player by subscriber and revenue market share in November 2019, RJio maintained its position in December 2019 with a subscriber market share of 32.1 per cent and a revenue market share of 35.4 per cent. This is significantly higher than its subscriber market share of 23.8 per cent and revenue market share of 29.8 per cent a year ago. ‘The increase in Rjio’s market share is largely at the cost of a reduction in VIL’s market share. VIL sheds 100bp revenue market share and 20bp subscriber market share on qoq (quarter on quarter) basis, largely to RJio in 3QFY20. That being said, the growth in subscriber base of RJio moderated in December 2019. As against the average monthly increase of around 9 million subscribers in the last one year, the subscribers grew by only 0.1 million in December 2019,” India Ratings says.

The writer is a journalist with 14 years of experience)

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