The four-year moratorium on payment of adjusted gross revenue dues as part of the government’s measures to address the liquidity requirements of telecom companies offers big savings in terms of cashflow for Vodafone Idea and Bharti Airtel, experts said.
The Union Cabinet approved the moratorium and other measures along with structural and procedural reforms for the struggling telecom sector on September 15.
The steps taken include rationalisation of interest rates on delayed payment of licence fees and spectrum usage fees and the scrapping of penalties and interest on penalties. Additionally, non-telecom revenue will be excluded while calculating AGR, offering major financial relief to telcos.
“Overall, it is very positive news for the telecom sector. Both Vodafone Idea and Bharti Airtel will benefit because they owe the government the most,” said Gaurav Garg, head of research at CapitalVia Global Research.
“It is a good relief for telecom companies and it is beneficial for Bharti Airtel and Vodafone as they don’t have to pay interest for the next four years,” said Sanjiv Bhasin, director at IIFL Securities. “It is also more credible for banks, which have given loans. Stocks are fully valued now and this news is already priced in.”
For Vodafone, it is “a big relief and well-structured deal,” although the company is demanding more relief measures, he said.
Telecom operators, already burdened with debt, faced additional stress after the Supreme Court ordered them in October 2019 to pay Rs 1,19,292 crore to the Department of Telecommunications as AGR dues. Bharti Airtel’s dues were Rs 43,980 crore and Vodafone Idea owed Rs 58,254 crore.
In September 2020, the Supreme Court allowed the telcos to stagger the payment of AGR dues, including penalty, interest, and interest on penalty, over 10 years through March 31, 2031. Vodafone Idea has already paid Rs 7,854 crore and Bharti Airtel Rs 18,000 crore as AGR dues.
Bharti Airtel shares gained 4.5 percent to Rs 725.55 at the close on the BSE on September 15. Vodafone Idea climbed 2.76 percent to Rs 8.93. Vodafone has rallied 47 percent this month on expectations of a telecom relief package.
“It is helpful for survival, at least in the case of Vodafone (which has been losing subscribers), though a lot of things need to be done on the government front to have three players in the telecom sector,” said Siddhartha Khemka, head - retail research, at Motilal Oswal Financial Services.
Reliance Jio, Bharti Airtel and Vodafone Idea are the only three private telecom operators in the country.
The reforms are “definitely a positive step” for telecom stocks like Vodafone and Bharti Airtel because they have a lot of savings in terms of cashflow, he said.
“Capex is a bigger challenge for these companies and they have to invest a lot for technology. The government has given a bloodline for Vodafone, which has been facing a huge debt burden,” Khemka said.
The other major beneficiaries are banks that advanced loans to the telcos, including IndusInd Bank and Yes Bank. Their shares gained almost 2 percent.
“A four-year moratorium on dues of the telecom sector which covers AGR, spectrum dues and interest payments will bring big relief to the cash-strapped sector. This is positive for banks, too, since banks’ exposure will decline significantly,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services. “Allowing 100 percent FDI in telecom and redefining AGR to exclude non-core revenue are welcome steps that can stimulate investment.”
Aprajita Saxena, a research analyst at Trustline Securities, said it was beneficial for IndusInd Bank, which had advanced Rs 3,300 crore to Vodafone, and Yes Bank, which lent Rs 300-400 crore to Vodafone.
“These banks also have exposure to Bharti Airtel,” Saxena said.
She said the money saved due to the moratorium can be used to set up and maintain telecom infrastructure and to buy 5G spectrum at the upcoming auction.
“Also, it will support their balance sheets. The news also sends the message that India is an investor-friendly nation to global companies,” Saxena said.
Garg of CapitalVia said the package frees up funds that can be used to fuel investments, especially in 5G technology.
“The government’s work in putting together a telecom package is intended to prevent the telecom sector from becoming a duopoly. These are possible actions that will pave the path for reform in this area,” he said.
Vodafone Idea’s gross debt, excluding lease liabilities and including interest accrued but not due, was Rs 1,91,590 crore as of June 30, 2021. Deferred spectrum payment obligations stood at Rs 1,06,010 crore and AGR dues at Rs 62,180 crore.
What should investors do?
“Investors who have already added these stocks to their portfolios may hold them for long-term capital gain as these moves may have an influence that will be felt in the next 2-3 years,” said Garg.
Rahul Sharma, cofounder of Equity99, advised investors to stay invested in the sector.
“We are highly bullish on this sector after such a move by the government,” he said. “Bharti Airtel is our top pick, with Vodafone Idea and Indus Tower.”
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