Telecom | Update
Sector Update | 11 June 2020
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AGR liabilities case: SC deliberating on payment timelines
Our earlier telecom update
The Supreme Court (SC) in its hearing today took cognizance of central government
and telcos’ plea that if no staggered payment option was given, some telcos would
have to shut shop. Moreover, with insufficient porting capacity, consumers could face
severe problems, with banks potentially suffering major NPAs.
The SC has now asked DoT/telcos to submit the roadmaps of payment, timelines to be
allowed, and securities for the AGR liability by the next hearing on 18 June’20.
A 20-year grant would result in cash outgo of INR27b/INR52b for BHARTI/VIL, and VIL
would need a ~50% ARPU hike to service its obligations. However, lower payment
tenure may put pressure on VIL’s cashflows.
A similar tariff hike by BHARTI/RJio would result in incremental EBITDA of
INR211b/INR280b, implying a 45%/63% increase in EBITDA over our current estimates
Maintain our bullish stance on BHARTI, with TP of INR710 on SOTP; maintain RJio at
INR885/share post its debt reduction plans and ongoing series of funding from global
SC takes note of telecom woes, but seeks roadmap on AGR payment
The SC, after dismissing the self-assessment pleas of AGR liabilities in earlier
hearings, took cognizance today of the central government and telcos’ plea that if
no staggered payment option was given, some telcos would have to close down.
Moreover, with insufficient porting capacity, consumers could face severe problems,
with banks potentially suffering major NPAs. The SC has now asked DoT/telcos to
prepare a clear roadmap for payments and timelines and securities/guarantees that
could be provided for the AGR dues. On the DoT option to consider payments over a
20-year period, the court countered that 20 years into the future remains quite
unpredictable and may or may not be assumed reasonable. It further asked what
securities / bank guarantees could be provided over the timelines proposed. The
subsequent hearing is scheduled to take place on 18
June’20. BHARTI and VIL have
put forward that their telecom licenses may be revoked by DoT in case they default
on their timelines; VIL has clearly mentioned that it does not have the capacity to
provide bank guarantees of ~INR500b.
Our earlier telecom update
Price hikes inevitable
VIL needs ~50% ARPU hike to support cashflow
In the event that the apex court grants a 20-year staggered option plan to the
incumbents to pay their AGR dues, maintaining the NPV of the balance AGR dues at
an 8% interest rate, this would result in cash outgo of INR27b/INR52b per annum for
BHARTI/VIL over a 20-year period (refer to Exhibits 1, 2). Considering VIL’s liquidity
constraints, it needs a ~50% ARPU increase to achieve EBITDA of INR300b by FY22E.
This is to bridge the gap of INR128b EBITDA in FY22 against cash requirement of
(refer to Exhibit 3): a) INR165b in deferred spectrum liabilities, b) INR52b in annual
AGR payment, c) INR30b in cash interest cost to lenders, and d) capex of ~INR52b.
This is assuming there is no further subscriber churn, which also seems unlikely
given the weak network capability and negative consumer sentiment.
Aliasgar Shakir – Research Analyst
(Aliasgar.Shakir@motilaloswal.com); +91 22 6129 1565
Suhel Shaikh – Research Analyst
(Suhel.Ahmad@MotilalOswal.com); +91 22 5036 2611
Investors are advised to refer through important disclosures made at the last page of the Research Report.
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