◾Nudging the sector to duopoly
▪️The long-drawn AGR liability court battle seems to have reached some conclusion as
the Supreme Court (SC) gave its verdict on timelines. It allowed for a 10-year repayment period for the AGR liability (@8% MCLR), with 10% of total dues to be paid upfront on 31st March’21 and the rest in annual payments from March’22.
▪️Positively, for Bharti/RJio, the AGR liability of partly acquired/shared spectrum of Aircel (INR124b) / RCOM (INR252b) is to be decided by NCLT and therefore restricts the liability. However, the fully acquired spectrum of Videocon (INR14b) would fall on Airtel.
▪️As per Bharti’s counsel, the option of review and curative petitions is available with
the telcos for two purposes: a) the elimination of SUC-related AGR liability (reducing the amount by ~40%) – as the case was only related to license fee and b) payment timelines. We see limited grounds for this.
▪️ Bharti/VIL would have to pay INR45b/INR58b by March’21 (10% upfront payment) and INR34b/INR66b annually (assuming an 8% discount rate) from March’22 for 10 years.
▪️We expect Bharti to be able to manage the payment with FCF post-interest of >INR100b/INR200b in FY21/FY22, with no tariff hike built-in and net debt of INR1,095b in FY21, including the AGR liability (net debt to EBITDA of 2.8x on pre-Ind-AS 116). *Maintain Buy.*
▪️ VIL, with pre-Ind-AS 116 EBITDA of INR68b in FY21 and net debt of INR1.5t (including the AGR liability), is in a precarious situation. However, with payments from Vodafone PLC, Bharti Infratel, and existing OCF, it could manage the current fiscal, but would require a sizeable price hike and capital infusion (board meeting on 4th Sep).
◾ *SC verdict gives a breather*
After a marathon round of hearings that lasted more than six months, the SC has
considered the telcos’ pleas for an extended timeline to make a hefty AGR payment.
However, against DOT/telcos’ request for 20-/15-year timelines, it gave a 10-year repayment term at 8% MCLR, with 10% upfront dues payable on 31st Mar’21 and the rest in annual payments from Mar’22. It is unclear whether the upfront amount is part of the payments that have already been made or whether it is incremental; we assume it is incremental given that the SC is aware of existing payments. Bharti/VIL would have to pay ₹45b/₹58b by March’21 (10% upfront payment) and ₹34b/₹66b annually (assuming an 8% discount rate) from March’22 for 10 years. The silver lining is that the SC did not pass any adverse verdict for the insolvent telcos and left it to the NCLT to take a call on the AGR liability of the insolvent telcos, which have sold a part of the spectrum – RCOM/Aircel to RJio/Bharti – thus limiting the additional liability of INR252b/INR124b. However, the SC has taken an adverse call for companies that have sold the entire spectrum – Videocon to Bharti – thus increasing the liability by INR14b.
◾ *Options and impact on telcos*
As per Bharti’s counsel, the option of review and curative petitions is still available with the telcos for two purposes:
a) the elimination of the SUC-related AGR liability and b) payment timelines.
Although the verdict is applicable for SUC-related levies too, DOT’s case against the telcos was only on license fee, which could potentially reduce the liability by ~40%. Furthermore, the telcos could also file a review petition on payment timelines, as is a given for VIL’s precarious situation – the company may be keen to get a longer extension. However, the SC has clearly disallowed any recalculation of the amount. We see limited possibility of getting the review and curative petitions through, which could potentially extend the outcome of the case.
◾ *Price hike imminent*
With this verdict, the balance sheets of both VIL and Bharti would weaken. Hence, noise for a tariff hike would certainly grow as VIL would require a massive ~INR110 cumulative ARPU increase in FY22 and FY23 to manage its operations sustainably.
We believe that with the Smartphone market largely settled and prevailing low ARPUs, there is a strong case for a price hike. However, given the challenging economic environment, we see limited possibility on an immediate basis.
◾VIL’s leverage continues to be in a precarious situation
VIL should be able to manage the cash flow requirement in FY21 without a price hike. This is considering that it has a total INR141b cash requirement in 9MFY21 (including capex of INR64b and an upfront amount of INR58b for AGR, along with cash interest cost of INR19b), against INR51b of OCF, INR71b from Vodafone PLC, and INR40b from the Bharti Infratel stake sale. Furthermore, in FY22, it would require an annual INR66b AGR liability payment, which would increase its annual requirement to INR161b, of which it should be able to manage INR123b from OCF and its FY21 cash balance. Hence, to offset the cash requirement, it would have to take ~22% price hike to manage the funding requirement. However, FY23 onwards,
its cash requirement should increase to INR327b, including an INR165b deferred-spectrum liability. The company may require a huge round of price hike, along with a capital raise (board meeting on 4th Sept), to offset the gap. In the previous round of price hike in Dec’19, a ~25% tariff hike increased its EBITDA by just INR12b (20%), given the huge subscriber churn. This leaves just the price hike unviable to sort out cash flow issues. VIL’s net debt, including an AGR liability of INR1.5t in FY21, against current EBITDA (pre-Ind-AS 116) of INR69b, makes it difficult to reconcile how this could be addressed.
◾Bharti’s case remains strong
In FY21/FY22, Bharti’s EBITDA (pre-Ind-AS 116) of INR385b/INR467b and FCF post interest of INR112b/INR210b should certainly put it in a comfortable position to repay its annual AGR payment of INR34b. With a positive FCF, its net debt of INR1,095b in FY21, including the AGR liability (net debt to EBITDA on pre-Ind-AS 116 of 2.8x), should reduce going forward. Furthermore, Bharti has the best hedged position. In order to survive, if VIL triggers a price hike or if the market turns duopoly, Bharti would benefit significantly in both cases, with a potential EBITDA increase of >100–120b. Maintain Buy, with TP of INR700.