Telecom sector for GoFYI

Telecom Sector: Tracking the developments (GDPI prep)

Telecom sector is in the throes of a crisis with the recent Supreme Court judgement on AGR. The ruling implies an additional burden of about Rs 60,000 crore on top two companies. While the entry of Jio was itself a big blow, the judgement has further compounded the matter. So, what is AGR? And, what is the current financial state of the companies? Let’s find out.

By Ashish Agrawal | IIM Calcutta (alumnus) | Founder, India Business Analysis (knowledge portal)

The genesis of AGR (Adjusted Gross Revenue) dispute goes back to 1999 when the telecom operators were given the option of paying license fees and spectrum usage charges as a percent of gross revenue instead of a fixed fee. This was done to help them manage their costs. However, a point of contention soon arose on whether AGR includes non-core incomes such as rents, dividends, profit on sale of assets etc or not. Principal of natural justice would possibly conclude that fees should be applied only on the income directly generated from using the resources for which it is being charged, in this case, the spectrum. TDSAT (Telecom Disputes Settlement and Appellate Tribunal) thought so and ruled in favour of the operators in 2015, on the case filed in 2005. However, the Supreme Court has set aside that judgement leading to the current crisis in the telecom sector.

The impact of this ruling would not possibly have been so severe but for the upheaval created by the entry of Jio. The entry not only led to exit of players like Tata Tele and R-Com, it also caused severe losses for the existing operators. Bharti Airtel incurred cumulative losses of close to Rs 12,000 crore during FY17-FY19 after profit of over Rs 20,000 crore in the preceding two years (FY15-FY16).  For Vodafone idea, two separate entity which merged after the entry of Jio, it was worse with losses of over Rs 19,000 crore after a modest profit of Rs 5,600 crore in FY15-FY16 (on combined basis).

The AGR dues have worked out to about Rs 34,000 crore and Rs 26,000 crore respectively for Airtel and Vodafone Idea. Interestingly, core dues are only around one-fourth of the total and the rest is interest and penalty for last 14 years. This means, if the companies had sought an escrow arrangement where they could deposit the dues under dispute and kept doing so during the pendency of the case, total liability would have been much less.

The impact of this provisioning reflects in the financial results of Sept’19 quarter. Airtel has recorded losses of Rs 24,500 crore during the quarter, up from Rs 1,300 crore in the previous quarter. Vodafone Idea recorded losses of over Rs 50,000 crore, the highest so far in the corporate history. This has resulted in Vodafone Idea’s equity eroding from about Rs 60,000 crore at the end of FY19 to Rs 24,000 crore by Sept’19. (Erosion in equity is not equal to losses due to Rs 25,000 crore of equity raised in April’19). Of the equity raised recently, Rs 18,250 was provided by the promoter groups, the reason why both the promoters look completely dis-inclined to pump-in any more money. A worrying part of its balance sheet is that ‘intangible assets’ account for Rs 1.3 lakh crore out of total assets of Rs 2.5 lakh crore. Intangiblesdo not correspond to any actual assets but refer to ‘goodwill on merger’, trademark etc and have little value in case of liquidation. Other than long-term borrowings of Rs 1.2 lakh crore, company is also facing significant short-term pressure also with current financial liabilities (maturing within next 12 months) of close to Rs 36,000 crore. Against this, its cash and bank balance stands at just about Rs 10,000 crore.

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Airtel is reasonably well placed with close to Rs 70,000 crore of equity although down from Rs 91,000 crore a quarter ago. While company also has a huge debt balance of nearly Rs 1.2 lakh crore, it doesn’t seem to have serious short-term pressure. To maintain its financial health and credit rating, company has proposed to raise equity of close to Rs 14,000 crore. This is the second equity raising exercise during the year with first rights issue in May’19 mopping up Rs 25,000 crore.

The worst appears to be over for the sector with the recent tariff hike and deferment of dues by two years allowed by the government. However, there is still severe short-term pressure on Vodafone Idea which continues to face an uncertain future.

About the Author:

Ashish Agrawal is an alumnus of IIM Calcutta and IIT Roorkee and the Founder of a business analysis portal.

He has also written a book, Indian Economy & Business. The book is a collection of articles providing simplified, yet comprehensive analysis of key economic, industry, corporate events. It is an attempt to help students of business management gain a perspective on contemporary business issues.