Only a couple of days ago, the Supreme Court of India granted the telecom companies a 10 year-long period for clearing all the dues of Adjusted Gross Revenue (AGR). This verdict offered the telecom sector a much needed relief. While the companies still have to pay the dues of around 1.43 lakh crores to the central government, they do not have to pay all at once. The period saved some of the telcos from winding down their business if they had to pay the due amount in full to the government.
The Supreme Court agreed on the fact that if the telecom companies are not bailed out with a staggered payment option, it can create an adverse impact on the banking sector. The government also pleaded to the court about the adverse impact this decision would have on the already staggering economy of India.
Agreeing to the plea of the center, the court has offered the telecom companies a time within which they have to pay the dues in full to the government. However, instead of the appealed 20 years, the court has given the telecom companies only 10 years to pay off their dues.
While this is no doubt welcome news, the advisors like Shyam Advisory think that the repercussions of this decision on the stock market would be mixed.
Before knowing how this verdict affects the telecom stocks, let’s know more about the AGR Case. The knowledge about this case will help you to make better stock decisions in the future.
Under the national telecom policy of 1994, the telecom sector of India was liberalized. That means licenses were issued to the telecom companies for doing business in India in exchange for scheduled licensing fees.
As the companies were just starting their business in the country and the licensing fees were just too steep for them to reach, the Government decided to change the tactics. Instead of the rigid licensing system, the government offered the telecom companies an option for shifting to the revenue sharing fee model.
This model demanded from the telecom companies a percentage of their adjusted gross revenue as the fees for doing business in India. The government will take this AGR as the licensing fee and the charges for the spectrum usage. An agreement drafted and signed by the telecom companies as well as the officers of the Department of Telecommunication (DoT) defined the gross revenue of the companies.
The AGR is calculated on the gross revenue of the companies after calculating out several deductions described in the licensing agreement. The spectrum usage charges and the licensing fees were set at about 8 per cent. The agreement also agreed upon 3-5 percent of AGR as the respective charges. This percentage of AGR depended on the agreement drawn by the DoT and the telecom companies.
Stock options tips indicated that the dispute between the DoT and the AGR started due to the contradiction of the definition of AGR. The DoT told the companies that the AGR includes all revenue of the companies, including the revenues generated from the telecom as well as non-telecom services.
The companies, on the other hand, said that the AGR should be calculated on the accrued revenue of the core services. The dividend, profit on the sale of any fixed asset of investment, and the interest income of the companies should not come under AGR.
Cellular Operators Association of India (COAI) challenged the definition of AGR propagated by the government in 2005. In 2015, the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) put up a stay on the AGR case in favor of the telecom companies. TDSAT stated that the AGR should be calculated on all receipts except for the capital receipts and revenue from the non-core sources like dividend, profit from the sale of the fixed asset, interests and miscellaneous other income. However, in October 2019, the Supreme Court of India upheld the definition of the AGR derived by the DoT.
The contentions regarding this AGR issue is going on for so long due to its financial implications for the government as well as the telecom companies. There is no doubt that the government has been deprived of the extra revenue, but the experienced financial advisors, like Shyam Advisory, think that the financial implications of the verdict on the telecom companies are significant as well.
Understanding the seriousness of the situation, in the course of hearing, the center appealed to the court to allow the companies a 20 years breather window to pay the due amount. The Supreme Court, however, made it clear that the companies have to pay the amount without further review while offering them a 10 years window to follow suit.
The court also made it clear that the companies have to pay the dues in toto through yearly equal installments. The concession to the companies has only been granted on the conditions that the dues to be paid punctually within the stipulated time. Even a single default will attract the dues along with the penalties, interest and interest on penalty as described on the agreement.
The Dues of the Telecom Companies and The Ways They Have to Pay
? The AGR dues on Vodafone are around 54,754 rupees, while Anil Ambani Reliance Communications face dues of about 24, 194 crores. Aircel’s tab is around 12,389 crore rupees while Tata Group has to pay about 12,601 crore rupees as due.
? Bharti Airtel and Reliance Jio are not liable to pay for past AGR dues of Aircel and Reliance Communications for using their spectrum. They only have to pay the AGR charges for time they used the spectrum.
? By March 2021, the companies have to pay the first installment of 10% of their dues.
? The annual installments have to be paid by the end of every financial year, violating which the companies will have to face a penalty.
? The Supreme Court has decided March 31st, 2031 as the deadline for the companies to pay the amount in full.
? Till 31st March 2020, a sum of 25,901 crores was deposited by the telecom companies.
? Total dues were about 1.7 lakh crore when the Supreme Court ordered the telecom companies to pay off their dues of the last 20 years.
The AGR verdict has offered some slack to the telecom companies of the country. However, the stock options tips offered by the experts indicate that the breather will not bring the same relief to all the telecom companies. For example, the verdict proved to be positive for Bharti Airtel. Compared to its close competitor, Vodafone-Idea, the dues of Bharti Airtel is substantially low. The verdict offered Bharti Airtel 10 years to pay its spectrum dues of which the company only has to pay 10% upfront.
According to market experts, the total dues of Bharti Airtel lies around 44,000 crores, of which the company has already paid 18,000 to the government. That means, Bharti Airtel has already paid more than 10 percent of the upfront requirements. Also, Bharti has provided about 47,000 crores in books. That means, going forward, P&L will not face any negative impact.
According to the financial advisories, like Shyam advisory, the company will potentially generate healthy cash flow from FY21 onward, and so that AGR payments of 4,400-4,700 crore should not be a big issue.
The analysts providing stock tips about Bharti Airtel are quite optimistic about the company shares with a price tag of Rs 710. However, the verdict of the Supreme Court was not quite as relieving for Vodafone Idea. The company was looking forward to a 20 years payment cycle which has now been reduced to 10 years. The company had an outstanding of 58,000 crores as AGR dues of which it has paid only about 7,900 crore rupees till now.
The market experts think that the high annual interest, amortization as well as depreciation costs, the annual AGR installments would be nothing but a burden on the cash flow of the company. However, if the three players decide a tariff hike across the board, it could provide some much-required reprieve to the company in the future.
The stock tips of the market analysts indicate that in the worst-case scenario, Reliance Jio and Bharti Airtel might have to shoulder the liability of the spectrum of Reliance Communications, Aircel and Videocon.
There is no doubt that the verdict of the Supreme Court has given a huge blow to Vodafone Idea Ltd. However, the stock options tips of the market analysts still suggest that the telecom company will survive. The shares of Vodafone Idea are down right now, but the stock market experts notice that they are higher than the lows the stocks have seen a few months ago.
Indeed, survival would be an uphill task for the telcos. The Supreme Court has offered the company a 10 years time frame to settle the AGR. That offered the company a lease of life. If Vodafone Idea can raise the money, the company will survive.
However, the investors should also not forget about the negatives of the condition Vodafone Idea Ltd is in. The company has large payments due from FY22 with no cash deposits to speak of. Even though the annual EBITDA is about Rs. 6,100 crore, which will rise to Rs. 10,000 crore, but that is not enough for an outright survival. The company might need a moratorium from the government of about 2 years to remain solvent even after FY23.
Even though Vodafone Idea is not a fly-by the night company, the traders have to keep in mind that without a large investment, the company might not offset the impact of AGR dues.
All in all, after the verdict of Supreme Court on AGR Case, it has been clear now that the balance sheet of the telecom giants, like Bharti Airtel as well as Vodafone Idea will weaken. The stock tips indicate that Vodafone Idea Ltd. will require a massive Rs 110 cumulative ARPU increase in both the FY22 and Fy23 to stay afloat and manage their operations successfully. With the smartphone markets mostly settled down and the low ARPU rate, there is a strong possibility of a price hike from the next quarter.