AGR Verdict: Analysts Positive On Bharti Airtel But Cautious On Vodafone Idea
Here’s what analysts have to say about the impact of Supreme Court’s AGR verdict on telecom operators.
Analysts expect Vodafone Idea Ltd. to face massive payment obligations after the Supreme Court granted telecom operators 10 years to pay thousands of crores worth of statutory dues stemming from the revised definition of adjusted gross revenue, prompting the carrier to further hike tariffs to sustain business.
Bharti Airtel Ltd., on the other hand, may benefit as the Sunil Mittal-led telecom service provider is expected to generate healthy cash flows, helping it to comfortably pay the annual installments, according to the reports of research firms, including Morgan Stanley, BofA Securities and Motilal Oswal.
The Supreme Court in October 2019 had ruled that non-core revenue must be included while calculating statutory levies, ending a 14-year-old legal battle between mobile operators and the government on the definition of AGR. That had increased the liabilities of Bharti Airtel and Vodafone Idea to more than Rs 90,000 crore at a time they were locked in a brutal tariff war with Mukesh Ambani’s Reliance Jio Infocomm Ltd.
While the apex court granted more time to the carriers, they will have to pay 10% of the total dues by March 31, 2021. This indicates those telecom firms that have already paid 10% or more of total dues will have to make the next payment in 2022. There will also be an 8% interest on the pending dues during the extension that’s been granted by the top court.
Of the 19 analysts tracking Vodafone Idea, 10 have a ‘sell’ rating, two recommend a ‘buy’ and the rest suggests a ‘hold’. The average of Bloomberg consensus 12-month target prices implies a downside of 16.7%.
For Bharti Airtel, 28 of the 29 analysts recommend a ‘buy’, and no ‘sell’ rating. The The average of Bloomberg consensus 12-month target prices implies an upside of 27.7%
Here’s what analysts have to say:
- Payment obligations will be enormous for Vodafone Idea and the company will have to raise funds to repay AGR liabilities
- Expects tariff hikes
- The telecom sector will remain into an oligopoly market structure
- Remains positive on Bharti Airtel as the sector’s top pick
- The verdict is harsher than the street expectations
- Vodafone Idea payment burden will get onerous and the company will have to raise tariffs to meet the obligations
- Bharti Airtel and Reliance Jio are likely to gain due to subscriber churn
- The Supreme Court verdict is not as beneficial to Vodafone Idea, considering the high annual interest, depreciation, and amortisation cost. The annual AGR dues can put further strain on the cash flows of the company
- If there is across the board increase in tariffs by the three players, then it can provide a reprieve to Vodafone Idea in the future
- The verdict is positive for Bharti Airtel as the company is expected to generate healthy free cash flows from 2020-21 onwards and therefore; the annual AGR payment of Rs 4,400-4,700 crore will not create much burden
- Vodafone Idea needs a major tariff hike to sustain its business. It expects ARPU of Rs 200-240 over the next 18 months (from current levels of Rs 124) to cover the AGR impact
- There are risks of market share loss if the company curtails capex to conserve cash
- Bharti Airtel is well-positioned to capitalise on high-end users and Reliance Jio on mid-to-low end.
- Bharti Airtel is better placed to benefit from tariff hikes and Reliance Jio is well placed to benefit from digital opportunity upside
- Vodafone Idea leverage continues to be in a precarious situation. The company may require a huge round of price hike, along with a capital raise to pay the regulatory dues in the future.
- Bharti Airtel case remains strong as its expected Ebitda of Rs 38,500 crore / Rs 46,700 crore in FY21 and FY22 put it in a comfortable position to repay its annual AGR payment of Rs 3,400 crore. With positive free cash flow, its net debt will reduce
Deutsche Bank Research
- AGR verdict leaves Vodafone Idea with an option of substantial price increase or massive restructuring. The company’s best hope seems to restrain capex and avoid spectrum auctions, but a controlled fall has risks of its own given the outsized debt being carried
- Bharti Airtel has a significant chance of ending up a very strong number two operator due to the pricing power and economies of scale. However, Airtel will have to fight hard with Jio to improve its position