Supreme Court’s refusal to budge on AGR ruling could be the last nail in Vodafone Idea’s coffin

Our Bureau Mumbai | Updated on March 19, 2020

The funding will also be provided to thousands of Vodafone Idea employees for health measures taken as a result of the Covid-19 pandemic   -  BusinessLine

Airtel and RJio stand to gain hugely from its demise

The Supreme Court’s latest ruling on the issue of Adjusted Gross Revenue (AGR) creates a very dire situation for Vodafone Idea, which could lead to a duopoly in the Indian telecom market.

In a research report on the AGR verdict and its fallout, analysts at international brokerage firm Bernstein said: “We do not see how Vodafone Idea can meet the demands of the court... (it is) therefore in threat of insolvency.”

The Department of Telecom (DoT) had officially requested that the interest and penalties imposed on the operators be frozen as of the October 24, 2019 ruling date, and that the court allow the operators up to 20 years to pay any outstanding balance at a reduced interest rate of 8 per cent.

The DoT highlighted to the court the importance of maintaining three viable private operators; the importance of maintaining services to the 300 million customers of Vodafone Idea; and the consequences a bankruptcy would have on employment and the banking sector.

The Supreme court, however, refused to consider any amendment to its earlier ruling. It has denied any relief to the sector saying that to do so would make the Supreme Court party to fraud.

RJio best off

Reliance Jio is the only operator to make its full payment by the court-ordered January 23rd deadline. Given its late start in the industry, the company also had the smallest assessed liability: just ₹195 crore.

Bharti Airtel has paid a total of ₹18,000 crore, which it claims is the full self-assessment of both principal and interest owed. This is roughly half the ₹35,500 crore that had been assessed earlier by the government.

Vodafone Idea paid its self-assessed principal amount of ₹6,850 crore. This does not cover any interest, penalties or interest on those penalties. Vodafone-Idea estimates that it still owes ₹14,600 crore but the DoT's estimate is much higher, at over ₹53,000 crore.

“VIL has a cash balance of only ₹3,000 crore and needs to fund its quarter cash losses from the operation also. We believe VIL will struggle to meet the AGR dues in a worst-case scenario,” said ICICI Securities.

Even if the Supreme Court allows 20 years for the payment of dues, the company will struggle. “Even if a 20-year payment term is approved by the SC, the ‘viability EBITDA’ requirement for VIL will remain a steep number in the absence of a quantum relief,” said a report by Kotak

Airtel, RJio set to gain

In the adverse event of VIL shutting down, it could have repercussions on the remaining two players’ networks and costs due to the current network sharing structure in the industry.

Analysts at Motilal Oswal said the exponential pace of data volume growth coming from unlimited plans has already burdened the networks with sub-par speeds. VIL’s 118 million broadband customers and 3.8 billion GB of data traffic could increase Bharti/RJio’s traffic volume by 30-40 per cent. Assuming RJio and Bharti get a 40:60 subscriber share from VIL, both telcos could see an EBITDA addition of ₹15,000 crore and ₹10,000 crore, respectively.

Published on March 19, 2020

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