Telecom relief package: Impact on Vodafone Idea, Bharti Airtel

In order to reduce the stress on the telecom sector, the government has announced a slew of measures. Analysts view the latest measures as being largely positive for the incumbent players Vodafone Idea, Bharti Airtel and Reliance Jio, with Vodafone being the biggest beneficiary. We have tried to provide a summary of the relief package, and also the impact on each of the players. 

Major highlights from the telecom relief package:  

• The definition of Adjusted Gross Revenue (AGR)  has been changed. Now all non-telecom revenue is going to be removed from the revenues on which AGR is calculated. 
• Delayed licence fees (LF) and spectrum usage charges (SUC) payments to attract interest of MCLR+2%. There will be no penalty however. Also, the interest which used to be compounded monthly will now be compounded annually.
• Spectrum useful life in the upcoming auction is extended to 30 years from the current 20 years. This will have 10 years lock-in with a provision to surrender after 10 years with surrender charges.
• Sharing of spectrum to be completely allowed. 
• 100% FDI in telecom (up from 49%) approved through automatic route with safeguards.   
• Tower set-up process to be simplified. 
• Purchase of equipment by telecom operators to be made easier. 
• Moratorium of four years provided on spectrum and AGR dues. However, companies opting for the moratorium are to pay interest on the amount annually.

Impact of the announcements: Overall

The 4-year moratorium is the most note-worthy announcement of all. It alleviates the concern around whether the telecom industry would remain a 3-player market. However, It is important to note that the government has not reduced the liabilities of players. Even though the cash flow problem has been solved, for now, the onus shifts to these incumbent players to raise capital and improve their balance sheets. 

A look at what this means for Vodafone Idea, Bharti Airtel and Reliance Jio 

Vodafone Idea:

• Vodafone idea’s total dues to the department of telecommunications (DoT) stands at close to Rs 1.7 lakh crore. 
• The company had to pay these dues over the next 10 years, hence annual payment liability in annual spectrum and AGR liabilities comes out to be Rs 22000-24000 cr.
• Due to the 4-year moratorium, Vodafone Idea can save up to Rs 24,000 crore annually over the next four years. According to estimates by UBS, Vodafone Idea can save up to Rs 1 lakh crore in this tenure. 
• Vodafone Idea can now increase its capex to Rs 12,000 per year, which will help the company to avoid its market share loss.
• Notably, Vodafone Idea’s requirement for a hike in ARPU drops from 93% to just 4% in case it opts for this moratorium. The incremental EBITDA required to pay off its dues also drops from Rs 23,200 crore to Rs 900 crore.

• While the moratorium helps to solve the immediate liquidity woes of VIL, but it's ballooning debt and annual EMI after four years will be difficult to address, according to Motilal Oswal
• While it is definitely a relief in the short-term for Vodafone, much depends on the company’s ability to generate sufficient cash flows to reduce its debt pile. 

Bharti Airtel 

• Airtel has AGR dues of ₹43,000 crore, out of which it has already paid ₹18,004 crore by March 31.
• Having sufficient liquidity, Bhart Airtel may not avail the moratorium on annual deferred spectrum & AGR payments. 
• Also, due to better financial health than Vodafone idea, Bharti Airtel could avail better rates in the market compared to the government’s higher rate of interest (MCLR+2%). 
• Indirect benefits include tariff hike. A weak third player and the government’s efforts to save VIL certainly builds a strong case for a tariff hike in the near term compared to a stronger two player market.
• Other benefits are exclusion of non telecom revenues for the computation of AGR.
• However, if Bharti Airtel does opt for moratorium, it will save Rs 11,000 cr per year in AGR & spectrum payments but post moratorium, its per year payments will increase to Rs 18,000 cr per year due to accumulated interest, according to estimates by analysts. This package will help Airtel indirectly in terms of better profitability and cash flows. It will now have sufficient cash to make 5G related capex, the spectrum auctions for which are due next year.