Blow to telecom companies after SC rejects AGR review plea

The telecom companies’ face a big blow as the apex court of the country ruled out its review petition for Adjusted Gross Revenue (AGR) verdict given on October 24, 2019.

Many retail investors must be wondering what is AGR and how does it matter to the telecom companies?     

Here’s how!

The government allotted spectrum licenses to telecom companies, in return of spectrum fees. However, the government is demanding a certain percentage of revenue generated by these telecom companies. But the twist is that the telecom companies have been generating revenue from various activities, other than core telecom services like dividend, roaming charges, interest income, divestment of tower assets, etc and the government is demanding its percentage share on all the revenue generated by these telecom companies. On the other hand, telecom companies believe that the government should get a percentage of that revenue which comes from core telecom service only, for which they had approached the Supreme Court of India, which gave the verdict in the government’s favour.

Now with this blow, the stock of Vodafone Idea tanked more than 30 per cent but Bharti Airtel remained in the positive terrain. Bharti Airtel is relatively well-positioned in terms of financial health as against Vodafone Idea. Notably, the company has successfully completed fundraising through Qualified Institutional Placement (QIP) and Foreign Currency Convertible Bond (FCCB) worth US$ 3 billion, which puts Bharti Airtel in a good position amid this turmoil.

The overall dues that need to be paid to the government by all the telecommunications are more than Rs 1 lakh crore. Vodafone Idea which got merged in 2018 is expected to pay nearly Rs 50,000 crore to the government while Bharti Airtel owes more than Rs 35,000 crore. The worst thing is that this enormous amount has to be paid by January 24, 2020.

We believe that this verdict will lead to further deterioration in the financial health of telecommunications (excluding Reliance Jio) and consequently, more consolidation in the industry. Reliance Jio is less vulnerable to this outcome as it started its operations in 2016 only. Post Jio’s entry, there was a pricing war that led to a consolidation in the sector, as a result, only three main players are in the game at present.

Vodafone Idea is already facing an uphill task to service its debt of Rs 99,490.4 crore. In the latest declared quarterly result (Q2FY20), the company has reported consolidated net sales of Rs 10,840.2 crore while, its net loss during the quarter ballooned to Rs 51,051.4 crore. Bharti Airtel’s consolidated revenue during Q2FY20 was at Rs 21,131.3 crore while, its net loss ballooned to Rs 23,145.6 crore. 

These huge losses were on account of charges recognised by the telecommunications against AGR post Supreme Court’s verdict.

Another sector that is likely to face the hit of this outcome is banking sector which lend to these telecom companies. With deterioration in telecom companies and financial viability, the debt service ability has been weakening, thus, overhanging on the banking sectors. SBI, IndusInd Bank and ICICI Bank are expected to have more than Rs 1 lakh crore exposures to the telecom sector.