Telecom | Update
Sector Update | 11 June 2020
Telecom
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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
th
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
in FY22E.
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
investors.
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
th
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.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
Telecom | Update
BHARTI and RJio could see benefit
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 in FY22E (refer to Exhibit 4). Given both BHARTI and RJio’s better cashflow
positions, the companies could see strong benefit from the potential tariff hikes.
Thus, we believe the possibility of the next phase of tariff hikes seems quite evitable
on the premise that:
a) VIL needs to survive, and India cannot be a two-player telecom market, as it
would result in an extended effect on other sectors such as Banking, telecom
vendors, technology partners, and others.
b) The balance sheets of telecom operators have been leveraged and ARPUs
depressed since RJio’s entry into the Telecom space.
c) The system now recognizes the strategic significance of telecom operators post
the COVID-19 crisis, and the need for high-quality networks and telecom
infrastructure in the country’s drive to maximize digital usage in every field.
d) Marquee global technology giants, PE investors, and sovereign funds are
confident of the Indian Technology-Telecom sector. This can be observed from
~INR1t in inflows into RJio and further news of Amazon, Inc. & Alphabet, Inc.
eyeing stake in Bharti Airtel and VIL, respectively.
Furthermore, if the SC grants a payment period of 15 years, as per our estimates,
the annual outgo of BHARTI/VIL would stand at INR30b/INR60b (refer to Exhibit 5).
Moreover, if the granted period stands at a mere 10 years, the annual outgo would
be INR39b/INR77b for BHARTI/VIL (refer to Exhibit 6). Subsequently, the
corresponding tariff hikes requirement would increase with a fall in repayment
tenure.
Bullish on BHARTI, RJio
We maintain our bullish stance on BHARTI, with TP of INR710 on SOTP, assigning 12x
on FY22E India Wireless EBITDA and 6x on Africa. On the other hand, we assign TP of
INR885/share for RJio, assigning 13x on FY22E EBITDA post its debt reduction plans
and ongoing series of funding from global investors. We have forecast FY22E ARPUs
of INR185/INR148 for BHARTI/RJio and are yet to build in material tariff hikes up to
FY22, thus providing an incremental upside on EBITDA.
Exhibit 1: Annual payout for AGR dues by BHARTI over 20 yrs
Bharti Airtel AGR Payout
AGR dues as per Bharti
Additional amount paid
Total Amount Paid towards AGR
AGR as per DoT
Balance to be paid (NPV)
Period in yrs (N)
Discount rate (I/Y)
Annual Payout (PMT)
Exhibit 2: Annual payout for AGR dues by VIL over 20 yrs
Amount (INR b)
215
69
583
514
20
8%
52
Source: MOFSL, Company
Amount (INR b) VIL AGR Payout
130 AGR dues as per VIL
50 Total Amount Paid towards AGR
180
AGR as per DoT
440
Balance to be paid (NPV)
260
Period in yrs (N)
20
8% Discount rate (I/Y)
26
Annual Payout (PMT)
Source: MOFSL, Company
11 June 2020
2
 Motilal Oswal Financial Services
Telecom | Update
Exhibit 3: Price hike required by VIL to survive
(Amount in INR b)
Capex
Cash Interest
Deferred spectrum liability
AGR payment
Total EBITDA requirement
EBITDA (pre IND AS 116)
Incremental EBITDA required
Incremental revenue required
ARPU (INR)
Subscribers (m)
ARPU hike required (INR)
New ARPU (INR)
Increase in ARPU required (%)
FY22
52
30
165
52
300
128
172
245
138
304
67
206
49%
Source: MOFSL, Company
Exhibit 4: At 49%, ARPU hike (needed by VIL to survive),
BHARTI/RJio’s incremental EBITDA
Company
(Amount in INR b)
EBITDA
ARPU (INR)
Increase in ARPU due to VIL price hike (%)
New ARPU
Subscribers (m)
Incremental revenue
Incremental EBITDA
New EBITDA
Increase in EBITDA (%)
Bharti
FY22
471
184
49%
274
301
324
211
682
45%
RJio
FY22
447
148
49%
221
462
400
280
727
63%
Source: MOFSL, Company
Exhibit 5: Annual payout for AGR dues by BHARTI over 15 yrs
Annual AGR Payout (INR b)
AGR dues as per company
Additional amount paid
Total Amount Paid towards AGR
AGR as per DoT
Balance to be paid (NPV)
Period in yrs (N)
Discount rate (I/Y)
Annual Payout (PMT)
Bharti Airtel
130
50
180
440
260
15
8%
30
VIL
215
-
69
583
514
15
8%
60
Exhibit 6: Annual payout for AGR dues by VIL over 10 yrs
Annual AGR Payout (INR b)
AGR dues as per company
Additional amount paid
Total Amount Paid towards AGR
AGR as per DoT
Balance to be paid (NPV)
Period in yrs (N)
Discount rate (I/Y)
Annual Payout (PMT)
Bharti Airtel
130
50
180
440
260
10
8%
39
VIL
215
-
69
583
514
10
8%
77
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 7: BHARTI had provided lower AGR provisions in 2QFY20 reporting
Particulars of
Exceptional Items
(in INR b)
Principal
Interest
Penalty
Interest on Penalty
Total Amount
Amount
towards
License Fee
32
70
25
41
168
Amount towards
Spectrum Usage
Charges
30
52
13
22
116
Contingent
Contingent
Liability provided
Liability as of
in FY19
Sept'19
26
87
32
154
-
38
-
63
58
343
Source: MOFSL, Company
Exhibit 8: VIL had also provided lower provisions for AGR dues in 2QFY20 reporting
(Amount in INR b)
License charge
Spectrum charges
Total Outstanding
Interest and Penalty
Principal of license charge
Principal of SUC
Liability excluding interest and penalty
Recognized as exceptional item
Previous provisions
Sept 19
276
165
442
330
74
37
111
257
185
Source: MOFSL, Company
11 June 2020
3
 Motilal Oswal Financial Services
Telecom | Update
Exhibit 9: Telco-wise license fee outstanding, according to DOT demand (INR b) (based on media articles)
Company
Aircel
Bharti Airtel
BSNL
Etisalat
Idea
Vodafone
Total Vodafone Idea
Loop Telecom
MTNL
Quadrant
RCOM
Reliance Jio Infocomm Ltd.
S Tel
Sistema Shyam
TTSL
Telenor
Videocon
Total
License fee dues as
Interest on
License License Fee
per demand raised
balance License Penalty
Fee Paid Balance
by DoT
Fee
68
46
22
33
11
361
306
55
98
24
27
20
6
9
3
0
0
0
0
0
140
119
21
39
9
201
153
48
91
23
341
272
69
130
32
4
3
1
1
0
32
23
9
9
4
2
1
0
1
0
124
88
36
77
18
0
0
0
0
0
0
0
0
0
0
6
5
1
1
0
104
80
23
46
11
16
11
5
8
3
9
5
4
3
2
1,093
861
232
417
109
Interest on
Penalty
12
39
3
0
15
37
52
0
3
0
34
0
0
1
20
3
1
169
Total Outstanding as
th
on 5 July’19 as per
the Demand by DoT
79
217
21
0
85
198
283
2
25
1
165
0
0
3
100
20
10
926
Exhibit 10: Telco-wise SUC outstanding, according to DOT demand (INR b) (based on media articles)
Company
Bharti Airtel
Tata Group
Telenor
Total Vodafone Idea
Vodafone
Aircel
RCom
RJio
Others
Total
Principal
49
7
1
10
18
5
7
0
-
98
Interest
128
19
1
23
46
13
23
0
-
253
Penalty
21
3
0
4
9
3
5
0
-
44
Outstanding dues
198
29
2
37
73
20
35
0
-
395
Total Outstanding
229
110
20
35
0
15
410
Exhibits for leverage, cash positions of TSPs
Exhibit 11: VIL high debt of INR1.7t remains, raises question over solvency
Net debt (INR b)
Net debt/EBITDA (x)
24.6
12.1
2.8
2.6
2.1
2.4
1.3
3.0
4.7
8.4
9.9
8.3
Source: Company, MOFSL
11 June 2020
4
 Motilal Oswal Financial Services
Telecom | Update
Exhibit 12: BHARTI’s debt to reduce on account of FCF generation (INR b)
Net Debt (INR b)
Net Debt/EBITDA (x)
4.3
3.0
2.9
2.6
2.6
2.7
3.2
3.2
1.7
1.0
615
675
609
638
690
886
961
972
1,105 1,165
755
553
2.3
2.2
Source: Company, MOFSL
Exhibit 13: BHARTI’s FCF yield to reach 6% by FY22E
FCF post Interest (INR b)
2%
2%
1%
Yield (%)
6%
4%
0%
-3%
34
52
29
-3%
-8%
-77
-187
-62
-215
-278
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
FY22E
-10%
-9%
-7
112
193
Source: Company, MOFSL
Exhibit 14: RJio’s debt restructuring
247
460
2,354
1,080
246
89
147
10
11
7
11
9
6
209
Source: Company, MOFSL
11 June 2020
5
 Motilal Oswal Financial Services
Telecom | Update
Valuation exhibits
Exhibit 15: Bharti Airtel — SOTP based on FY22
EBITDA
(INR b)
India SA business (excl. towers)
Tower business (15% discount to fair value)
Africa business
Less net debt
AGR Liability
Total Value
Shares o/s (b)
CMP
Upside (%)
353
140
Ownership
(%)
100%
53.5%
55.2%
Proportionate
EBITDA
(INR b)
353
77
EV/
EBITDA (x)
12
6
Fair Value
(INR b)
4,233
235
463
883
180
4049
Value/
Share (INR)
776
43
85
162
33
710
5.5
552
29
Source: Company, MOFSL
Exhibit 16: RJio valuation on FY22E EBITDA
Particulars
EBITDA
EV/EBITDA (x)
EV
Debt
Equity Value
Value Per Share
(INR b)
447
13
5,823
584
5,240
885
Source: Company, MOFSL
11 June 2020
6
 Motilal Oswal Financial Services
Telecom | Update
Explanation of Investment Rating
Investment Rating
Expected return (over 12-month)
BUY
>=15%
SELL
< - 10%
NEUTRAL
< - 10 % to 15%
UNDER REVIEW
Rating may undergo a change
NOT RATED
We have forward looking estimates for the stock but we refrain from assigning recommendation
*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within
following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.
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11 June 2020
7
 Motilal Oswal Financial Services
Telecom | Update
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document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this
document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views
expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative products as well as non-investment grade
securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of
the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and
should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make
modifications and alternations to this statement as may be required from time to time without any prior approval. MOFSL, its associates, their directors and the employees may from
time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to
perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a
separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of
information that is already available in publicly accessible media or developed through analysis of MOFSL. The views expressed are those of the analyst, and the Company may or
may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on,
directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or
entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law,
regulation or which would subject MOFSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in
all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.
Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost
revenue or lost profits that may arise from or in connection with the use of the information.
The person accessing this information specifically agrees to exempt MOFSL or any of its
affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOFSL or any of its affiliates or employees responsible for any such
misuse and further agrees to hold MOFSL or any of its affiliates or employees free and harmless from all losses, costs, damages,
expenses that may be suffered by the person
accessing this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263;
Website
www.motilaloswal.com.CIN
no.: L67190MH2005PLC153397.Correspondence Office Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road,
Malad(West), Mumbai- 400 064. Tel No: 022 7188 1000.
Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst:
INH000000412. AMFI: ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate Agent: CA0579;PMS:INP000006712. Motilal Oswal Asset Management Company
Ltd. (MOAMC): PMS (Registration No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth
Management Ltd. (MOWML): PMS (Registration No.: INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is
a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt.
Ltd. which is a group company of MOFSL. Private Equity is offered through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL.
Research & Advisory services is backed by proper research. Please read the Risk Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no
assurance or guarantee of the returns. Investment in securities market is subject to market risk, read all the related documents carefully before investing. Details of Compliance
Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.
* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National
Company Law Tribunal, Mumbai Bench.
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