Weekend

Last week I wrote about the default by telecom operators in case of spectrum fees etc. Now the news is that Vodafone Idea (VI) is in a big soup which might lead to bankruptcy.

An unfavourable verdict of a two-decade-old legal battle between India’s mobile operators and the Government of India has put one of India’s oldest telecom operators Vodafone and Idea in a fix. The share prices of the Vodafone Plc and Kumar Mangalam Birla controlled entity have halved in value since the start of the year while that of its peer – Bharti Airtel Ltd. – has grown 15%.

The world’s lowest data rate introduced by the newest telecom operator, which is also now the largest – Reliance Jio Infocomm Ltd. – did wonder for Indians. However, the same left the telecom sector scathed – the number of players reduced to a third. Before the launch of Jio, there were nine private telecom operators plus two government players, which has now reduced to three private telecom operators plus two government players.

To withstand the onslaught of cheap data rates and free calls introduced by Jio, the two separate wireless carriers in 2018 – Vodafone India and Idea Cellular – joined hands and they called the joint venture VI

Amidst this, came the unfavourable outcome of a two-decade-old dispute over how revenue is to be defined for license fee and spectrum usage charges. Telecom operators are liable to pay around 4% and 8% of the Average Gross Revenue (AGR) as spectrum usage charges and license fees, respectively, to DoT.

The argument was on what to include and exclude while calculating AGR.

Operators thought only receipts from core telecom services were to be included, but the Department of Telecommunications wanted a piece of other revenues as well, i.e., from rent, dividend, and interest income to profit on sales of fixed assets. India’s Supreme Court upheld the government’s demand in October 2019, putting Vodafone Idea on the hook for Rs 58,300 crore.

Once this outcome was done, the operators continued their plea to rectify what they say are errors in the government’s calculations and for staggered payment. The court did allow staggered payout as the operators were incapable of paying thousands of crores as dues and penalties at one go. Because of this, Vodafone Idea did avoid bankruptcy last year, but its viability is again in doubt as recently the Supreme Court (SC) rejected the rectification plea.

Now what are the dues of  Vodafone Idea are (as per DoT) Rs 58,254 Cr, out of this they have paid Rs 7,850 Cr and during last week it was announced by Vi that they are unable to pay even staggered payment’s installment. On the other hand, Airtel dues are Rs 43,980 Cr, out of which they have paid Rs 18,004 Cr. As per both the operators their self assesses liabilities should be Rs 21,500 Cr and 13,000 Cr respectively.

As a new entrant, Reliance Jio has dodged the missile of past AGR dues to the govt. Also, by keeping a lid on data prices, Jio continued to gain market share which made it profitable. And on the back of this, it is now armed with equity from Facebook Inc. and Alphabet Inc., and many others.

Airtel, finances were tight. But a successful equity raise, divestment of stakes in other businesses, and no loss in subscriber base helped tide over these difficult times. Promoters too have added more money. More importantly, Airtel took a conservative stance and added provisions to their accounts (took the losses earlier) against the high govt demand.

As of 31^st March 2021 the total loss if VI stood at Rs 1.8 lakh Cr. Of this-nearly 87% is owed to govt, and the remaining (as per media reports) to banks, among the banks, a large chunk to SBI, Yes Bank, and IDFC First Bank. As per reports debt dues in the next  8 to 10 months are to the tune of Rs 32,000 Cr, and VI in advance has said that they are incapable of paying this amount.

Bankruptcy is a likely solution for VI, because this is exactly what bankruptcy resolution is meant to do. If Vodafone Idea were to go through bankruptcy, then everyone including the banks and the government would have to take a haircut. In lieu, they can be given a stake in the company, which may then be able to revive itself without the heavy burden. Bankruptcy means a new promoter can come in – either a foreign or Indian one – and take over the assets.

In such a case, we expect shareholder equity to go to zero, meaning: if there’s a bankruptcy resolution, current shareholders are likely to get nothing.

There’s a hitch though: the government may not allow a buyer to use the spectrum unless AGR dues are paid. In which case a buyer will have to re-bid for the spectrum, which changes cost metrics considerably. In fact, an earlier NCLAT, ie National Company Law Appellate Tribunal, ruling specified that spectrum cannot be transferred to a bidder unless AGR and other govt dues are paid.

This means, they will have to wait till December 2021, when some of the bonds/NCD is due for payment. If VI is unable to make the payment then a bankruptcy plea can be filed.

Now if VI goes bankrupt then Airtel and Jio stand to gain.

But in all  there are three possibilities

Possibility One:- VI shuts down.  Outcome: Airtel and Jio gain subscribers, and they’re likely to see revenues go up 28% or more.

Possibility Two:- Tariff Hike across the sector, or a Floor Price.  Outcome: Airtel and Jio will follow suit which will improve their financials as well, since they are now operationally profitable.

Possibility Three:- Government extends aid to the telecom sector Outcome: The aid will be applicable to Airtel and Jio as well. For instance, last time government provided a 2-year moratorium on spectrum payment which benefited Airtel and Jio also.

So let us wait and watch, what happens in the future.

Waiting for your views/comments.

Anil Malik

Mumbai, India

9^th August 2021.