Vodafone Idea faces challenges as India’s Supreme Court granted 10 years for Adjusted Gross Income (AGR) to be paid in installments.
Telecommunications companies must pay AGR fees along with interest and penalties, which are estimated at around 1.6 million rupees.
Bharti Airtel has already paid nearly Rs 18,000 crore versus nearly Rs 43,000 crore total AGR fees.
Vodafone Idea paid DoT only Rs 7,854 crore against its total AGR fees of approximately Rs 58,000 crore. Vodafone Idea has already significantly reduced its capex (investments) in the past quarters.
Tata Teleservices paid Rs 4.197 billion against AGR fees of Rs 16.789 billion. It is not clear whether Airtel will be forced to pay Tata Teleservices for its AGR fees.
Reliance Jio and Bharti Airtel, who took over the spectrum from Reliance Communication, Videocon and Aircel, said Rusmik Oza, executive vice president and head of fundamental research at Kotak Securities.
Vodafone Idea was looking forward to a payment cycle of 20 years, which has now been shortened to 10 years. The annual AGR contributions could put an additional strain on Vodafone Idea’s cash flows in view of the high annual interest and depreciation costs.
The AGR ruling is positive for Bharti Airtel as it has 10 years to pay the frequency fees.
Reliance Jio has already paid its AGR contributions. Reliance Jio is India’s leading telecommunications company based on the number of subscribers on its 4G network.
The Supreme Court has asked NCLT to determine whether spectrum held by telecommunications companies can be sold under IBC. Associate Equity Analyst at Angel Broking said.
Assuming an interest rate of 8 percent, Bharti and Vodafone Idea have to pay INR 39b and 75b, respectively. With an interest rate of zero percent, this reduces to INR26b or INR50b, says Hemang Jani, Head Equity Strategist, Broking & Distribution, Motilal Oswal Financial Services.
With the SC not saying anything about the contributions from R Com, Aircel and Videocon, it is certainly very positive for Reliance Jio and Bharti Airtel, said VK Vijaya Kumar, chief investment strategist at Geojit Financial Services.
According to the ICRA note, this relatively shorter payment timeframe puts additional pressure on cash flows, requires a significant increase in ARPU, and can impact industry structure.
Assuming these terms of payment are applied to the balance payable, telecommunications companies are required to prepay an amount of Rs. 9,000 crore by March 31, 2021, followed by 10 year installments of approximately Rs. 12,000 crore at an interest rate of 8 percent from February 2022 to February 2031.
“The proposed payment pattern is adding to the strain on the industry, which was already burdened with increased debt. This will also put pressure on cash flows and leave limited scope for network investment and expansion, ”said Ankit Jain, Assistant Vice President, Corporate Ratings, ICRA.
“The government had previously allowed the frequency auction rates to be postponed for the 2021 and 2022 financial years. However, this 10-year payment for the AGR fees dampens the relief on auction payments to some extent, ”said Anupama Arora, Vice President and Sector Head, Corporate Ratings, ICRA.
Annual rates for auction payments will be Rs 32,000 crore for the industry as of FY 2023, which combined with the annual rate of Rs 12,000 crore for AGR fees as of February 2022 will require a substantial increase in ARPUs to more than Rs 350 and has the potential to have a lasting impact on the structure of the industry.