Credit Suisse says telecom exposure risk has increased once again.
The Supreme Court's decision on January 16 to dismiss a petition seeking a review of its judgment on adjusted gross revenue (AGR) is a setback for Vodafone Idea, which owes government around Rs 44,000 crore.
The stock price fell by 39 percent intraday as the company, along with Bharti Airtel and other telecom entities, will have to pay AGR dues of more than Rs 3 lakh crore to the government by January 23.
The only option left with Bharti Airtel and Vodafone Idea is to file a curative petition with a wider bench, but the time is short.
The companies, however, can ask for more time from the government to clear the dues, brokerages say.
"It is likely that the government breaks its silence and spread out payments over a long period. No action by the government will include a major hit to government revenues. The chances of a relief from a curative petition before January 23 deadline look remote. Spread-out payments plus tariff increases are a feasible combination," IIFL Securities said.
The top court dismissed the review petitions filed by Bharti Airtel, Vodafone Idea and Tata Teleservices. The only state-owned telecom infrastructure services provider RailTel had also filed a petition for the review of the October 24 order.
In its order on the longstanding AGR-liability case, the apex court had then ruled in favour of the Department of Telecommunications and ordered the telecom companies to pay their AGR liabilities within three months of the judgment date, which will be January 23.
"The net debt-to-EBITDA for Bharti and Vodafone Idea increased to 4.3x and 11.6x, respectively," UBS said. The fundraising will help Bharti keep gearing levels in check but Vodafone Idea will be in a weak positioning if cash is used to make AGR payment, hence the verdict is clearly negative for Vodafone Idea as it faced meaningfully large liability, it said.
Bharti Infratel also corrected more than 13 percent intraday amid fear of losing towers of Vodafone Idea, but Bharti Airtel, which owes more than Rs 34,000 crore in AGR dues, rallied over 6 percent to hit a fresh 52-week high of Rs 503.60.
Reliance Industries, which owns Jio, also gained more than 2 percent intraday as both are expected to benefit in terms of subscribers.
Bharti Airtel added 16 lakh users in November (against 81,974 users in October), taking the number of subscribers to 32.73 crore.
Reliance Jio is the number one player in terms of subscribers (36.99 crore). It added 56 lakh subscribers in November against 91 lakh in the previous month.
In contrast, Vodafone India lost 3.64 crore subscribers in November against 1.89 lakh users it added the previous month. It had 33.62 crore subscribers at the end of November, making it the number two company in India.
Bharti Airtel and Vodafone Idea, together, reported a loss of nearly Rs 74,000 crore in the quarter ended September 2019 on provisioning for AGR dues.
Hence, most brokerages remain bullish on Bharti Airtel and Reliance Industries as tariff hikes and the gain from Vodafone Idea's loss would be a double benefit for them.
A curative petition is the last legal remedy available to Bharti and Vodafone Idea, Kotak Institutional Equities said.
“In case that fails as well, the ball moves in the government's court. The government's stance thus far suggests discomfort with offering any relief unless the SC allows it the flexibility to do so. This stance may change but the probability seems low. We see the development as a net positive for Bharti Airtel and remain buyers (revised fair value Rs 570 from Rs 510). Vodafone Idea stays not rated," Kotak said.
The brokerage says an increased probability of further consolidation in the sector is positive for Reliance Jio and Bharti, the immediate hit of massive AGR payouts for the latter notwithstanding.
"Upside from further consolidation will more than make up for the AGR payout impact for Bharti. Our valuation for Bharti had already assumed 100 percent upfront payment of AGR liabilities," Kotak said.
It has lowered fair value for Bharti Infratel to Rs 225 per share from Rs 275, taking the same probabilistic approach.
Motilal Oswal said Bharti Airtel was prepared with a Plan B by raising around Rs 21,000 crore in the last week by way of QIP (around Rs 14,000 crore) and FCCB (Rs 7,000 crore).
"The rest around Rs 13,000 crore could be funded by bank loans. Bharti’s present net debt stands at Rs 89,000 crore with EBITDA of Rs 40,000 crore in FY21 (net debt to EBITDA of 2.2x). So, incremental Rs 13,000 crore would still keep net debt manageable at Rs 1,02,000 crore with 2.6x net debt to EBITDA," it added.
While maintaining a positive stance on Bharti Airtel and Reliance Jio, Edelweiss said odds of relief are low but telcos may file a separate petition seeking a payment extension. "The onus of ensuring market structure does not move to a duopoly lies with government," it said.
Bharti would be able to repay the dues and gain market share.
"Bharti & Reliance are the top picks," IIFL Securities also said.
Citi, which has maintained a buy call on Reliance Industries and Bharti Airtel, also said telcos could ask the government to extend the payment deadline.
However, the news is not only negative for Vodafone Idea, but also for banks that lent money to the country's second largest telecom company.
Brokerages feel the AGR verdict is negative for banks, as their aggregate exposure to the telecom sector is at around Rs 1.3 lakh crore.
Nomura said AGR order is negative for banks exposed to Vodafone Idea (which has Rs 22,500-25,000 crore of funded exposure), especially SBI and IndusInd Bank which had 0.65 percent (Rs 14,000-15,000 crore) and 1.5 percent (Rs 3,000 crore) exposure of their first half of FY20's total loan book.
"The net impact of Rs 5,000-7,000 crore is manageable for SBI. ICICI Bank, too, has considerable exposure," the Japanese brokerage firm said.
According to reports, ICICI Bank and Axis Bank have 0.2-0.3 percent exposure to the sector.
Credit Suisse also said the risks to telecom exposure increased once again.
"Overall AGR dues amount to Rs 3.13 lakh crore and of which, the aggregate bank exposure to telecom sector is at Rs 1.3 lakh crore. IDFC First, Yes Bank and IndusInd's exposure is 8-12 percent of net worth to Vodafone Idea. PSU banks’ exposure is lower at 5-6 percent of networth for SBI & PNB," it said.
The Nifty Bank index slipped 0.65 percent intraday with IDFC First Bank, Yes Bank and IndusInd Bank falling more than 2 percent. SBI, ICICI Bank and PNB declined moderately.
At the time of publishing this copy, Vodafone Idea was quoting at Rs 4.64, down Rs 1.39, or 23.05 percent and Bharti Infratel was down 7.16 percent to Rs 225.45.
However, Bharti Airtel was quoting at Rs 492.55, up Rs 18.50, or 3.90 percent and Reliance Industries was trading at Rs 1,566.55, up Rs 28.85, or 1.88 percent on the BSE.
Disclaimers: Reliance Industries Ltd, which also owns Jio, is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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