AGR verdict: Impact on telecom stocks

Last updated: 02 Sep, 2020 | 04:16 pm

AGR verdict: Impact on telecom stocks

Telecom companies Bharti Airtel and Vodafone Idea faced a setback after the Supreme Court refused to allow telecom companies to make payment of AGR dues over 20 years. The court has instead allowed only a 10-year window for the telcos to repay. According to the court order, the 10-year timeline for payment of AGR dues will begin on April 1, 2021, and the companies need to pay 10% upfront by March 31, 2021. 

How much is due for Bharti Airtel, Vodafone Idea?

  • Clarity is still awaited on whether the 10% up-front payment includes the amount already paid till now, or whether the companies will have to make 10% payment on the amount due on Aug 31st.
  • If the dues paid are adjusted, the companies will not have to make any additional payment till March 2022, as Bharti Airtel and Vodafone Idea have already paid more than 10% of their respective dues outstanding
  • Given the size of their outstanding, Bharti Airtel will have to cough up about ₹4,638 crore annually for the next 10 years, while Vodafone Idea will have to pay up about ₹8,391 crore annually according to estimates by ICICI Direct (detailed below)
  • While Reliance Industries has paid its own dues of ₹198 crore, clarity is still awaited on whether it will have to pay even RCom’s dues. Rcom now owes the government Rs 25,194.58 crore in statutory dues

Financial position of Bharti Airtel and Vodafone Idea

  • Bharti Airtel had reported a consolidated EBITDA of about ₹37,105 crore in FY20. The amount of estimated outflow represents about 12.5% of FY20 EBITDA. 
  • “According to estimates by CLSA, given the tariff hikes and growth in earnings, the amount of expected outflow per year will fall to about 6% of FY22e Consolidated EBITDA.” Bharti Airtel remains comfortably placed to meet the AGR dues
  • Vodafone Idea had reported a consolidated EBITDA of about ₹5,800 crore in FY20. The amount of outflow calculated by ICICI Direct represents about 144% of FY20 EBITDA!
  • “Jefferies has estimated that Vodafone Idea will have to pay ₹5,000 crore upfront possibly by FY22, post which it will have to pay ₹6,800 crore (111% of EBITDA) annually from FY23.” Added to this is the interest burden, as Vodafone Idea has a debt of about ₹1.75 lakh crore.  
  • Apart from tariff hike (to the tune of approximately 92%), Vodafone Idea would also need immediate capital infusion to bridge the cash gap.

Impact on banks that have exposure to Vodafone Idea

  • In case Vodafone Idea is not able to pay up the dues, the banks that have lent to the telecom player will also come under pressure
  • The table below shows banks that have lent to Vodafone Idea (according to a report by Goldman Sachs)

INDmoney Analysis

  • While the judgement has given a fresh lease of life to Vodafone Idea, the window for Vodafone to raise funds, have better models and give paybacks commitment is small. The company has called for a board meeting on Sep 4th to discuss fundraising. Recently, the company also announced a stake sale in Indus Towers for ₹4,000 crore. However, the massive funding gap remains a concern.
  •  The verdict is positive for Bharti Airtel as the company is expected to generate healthy free cash flows from 2020-21 onwards and therefore; the annual AGR payment of Rs 4,400-4,700 crore will not create much burden. Bharti Airtel and Reliance Jio are well poised to gain market share going forward. 

Consensus recommendation

Bharti Airtel: Hold (Based on views of 26 analysts from external institutions)

Reliance Industries: Buy (Based on views of 33 analysts from external research institutions)

Vodafone Idea: Sell  (Based on views of 15 analysts from external research institutions)

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