Tremors of Possible Vodafone-Idea Collapse Spread After SC Rejects AGR Verdict Review Petitions

From the stock market to debt mutual funds, there are concerns over the consequences of a potential shutdown of Vodafone-Idea.

New Delhi: Shares of Vodafone-Idea plunged as much as 39% to hit an all-time low of Rs 3.66 on the Bombay Stock Exchange, a day after the Supreme Court firmly rejected review petitions moved by incumbent telecom operators against the controversial AGR (adjusted gross revenue) verdict.

In early trading, a total of 264.17 million shares changed hands on the BSE and National Stock Exchange, but the company’s stock slightly recovered and was trading down 25% as of 2:15 pm.

The apex court in October 2019 settled an over-decade-long dispute between the Department of Telecommunications and the telecom industry over payment of dues linked to AGR. With the rejection of the review petitions, all telecom companies will have to pay an estimated Rs 1.47 lakh crore in AGR dues to the government by January 23.

In the latest report, brokerage firm Citi pointed out that situation for Vodafone Idea “remains precarious” given that the liability equates to more than 2x to its current market cap. Meanwhile, according to estimates by Credit Suisse, net debt of Vodafone Idea could escalate to over 8x.

“The verdict may put a severe burden on telcos and have unconceivable repercussions, particularly against the backdrop of Vodafone Idea facing a risk of shutdown, it may result in Rs 1.2 lakh crore debt default, large-scale job losses and subscriber churn,” said analysts at MOFS.

They, however, pin hopes on government intervention to save the telecom firm.

Also read: Verdict on AGR: How Much do India’s Telecom Industry Have to Cough Up?

“Centre has to recover Rs 900 billion as deferred spectrum debt from VIL, which has stated it will shut operations if asked to pay the entire AGR liability. Also, VIL owes Rs 300 billion to banks (against this, Aditya Birla Group and Vodafone Plc’s stake in VIL stands at a mere Rs 70 billion and Rs 80 billion, respectively). Moreover, the implication on end-customer in the advent of VIL shutdown could be terrible. In such a scenario, we believe that the government may look to exercise other options,” they said.

In December 2019, Vodafone-Idea chairman Kumar Mangalam Birla had said that the telecom venture would shut down if the Centre didn’t provide any relief.

“We will have to shut shop,” Birla said on a query about the course of action for the company going ahead in the absence of government relief.

Franklin Templeton writes down?

Meanwhile, India’s mutual funds have also not been able to escape a possible Vodafone-Idea shutdown. According to the most recent data, MFs hold a nearly Rs 3,400 crore exposure to the company.

Among the asset management companies holding the paper, Franklin Templeton AMC took a a steep hit.

“Franklin India Ultra Short Debt Fund Super Institutional Plan, Franklin India Short Term Income Plan, Franklin India Low Duration Fund, Franklin India Credit Risk Fund. Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund have exposures of 4-7%. The schemes have written down almost their entire exposure to Vodafone Idea causing losses of 4-7% in their NAVs over a single day. The largest NAV drop has been in Franklin Low Duration Fund at 6.87%,” one report said.

“The AMC has taken this write off before any official downgrade by a credit ratings agency which would have mandatorily triggered a write down to NAVs as per a table issued by the Association of Mutual Funds of India (AMFI). The lack of a ratings downgrade has also prevented Franklin Templeton AMC from side pocketing its exposure. This can be done only when debt is marked below investment grade,” it added.

Bharti Airtel, on the other hand, gained up to 5.1% to hit a 26-month high of Rs 498.65 on the BSE. So far, about 12.6 million shares have changed hands on the counter on the NSE and BSE. Analysts remain positive on the stock after it managed to raise $2 billion (approx. Rs 14,000 crore) through the QIP route.

“Bharti Airtel has sought relief on AGR liability but also prepared itself with a plan-B by raising nearly Rs 14,000 crore during the past week by way of QIP and FCCB (Rs 700 crore). The balance Rs 13,000 crore could be funded by bank loans. Bharti’s present net debt stands at Rs 89,000 crore with EBITDA of Rs 40,000 crore in FY21 (net debt to EBITDA of 2.2x). So, incremental Rs 13,000 crore would still keep net debt manageable at Rs 1,02,000 crore with 2.6x net debt to EBITDA,” said analysts at Motilal Oswal Financial Services.

Also read: Situation Critical: Vodafone’s Future in India May Be in Doubt after SC Ruling

They further added that given the adverse situation for Vodafone Idea, Reliance Jio and Bharti Airtel could “gain disproportionately”.

“Thus, irrespective of an adverse ruling, Bharti has best hedged position even if it is required to pay the AGR liability. Assuming subscriber share of 70:30 for RJio/Bharti, both telcos could see EBITDA addition of INR240b/100b with 70% margin, implying a jump of 55 per cent/20 per cent,” they said.

Analysts at BofA-ML and Edelweiss Securities, too, maintain a positive stance on the stock.

“Given sufficient cash on its books, Bharti Airtel would be able to repay the dues and thus gain market share from competitors… While Bharti Airtel will have to now shell out INR340bn, it would be net-positive since revenue would spike without a concomitant addition of costs,” said analysts at Edelweiss Securities.

They added: In the absence of any government intervention, the market would turn into a duopoly benefitting incumbents Bharti and JIO. Bharti Airtel is trading at 7.2x FY21E EV/EBITDA, thus we maintain ‘BUY’ on the stock with a target price of Rs 533.

Disappointed with the decision, Bharti Airtel, which is facing an estimated AGR demand of Rs 35,586 crore said it was evaluating filing a curative petition, which is the last judicial resort available for redressing grievances.

A collapse of Vodafone Idea, however, could erode Bharti Airtel’s value in its subsidiary Bharti Infratel as Vodafone Idea is a large customer for Bharti Infratel.

According to analysts at SBICAP Securities, a decline of Vodafone Idea will accentuate tenancy losses and pressure on profitability. “Bharti Infratel contributes about 12 per cent of estimated FY20 consolidated Ebitda for Bharti Airtel and around 8 per cent of the fair value ascribed to Bharti Airtel,” they said.

“The industry continues to face severe financial stress and the outcome could further erode the viability of the sector as a whole. The industry needs to continue to invest in expanding networks, acquiring spectrum and introducing new technologies like 5G,” Bharti Airtel said.

(With inputs from Business Standard)