Supreme Court's AGR ruling will impact financial health of Airtel, Vodafone Idea: Moody's

Indian telecom industry's competitive dynamics as also financial health of Bharti Airtel Ltd and Vodafone Idea Ltd will be impacted if companies are to pay past statutory dues arising out of a Supreme Court ruling, Moody's Investors Service said on Monday.

Potential payment of past due fees weighs on credit profile of Bharti Airtel Ltd despite spectrum moratorium and price hikes, it said.

Supreme Court on October 24 upheld government's definition of adjusted gross revenue (AGR), which is basis on which telecom companies' license fees and spectrum us charges are paid. Bharti Airtel, Vodafone Idea and or telcos face as much as Rs 1.47 lakh crore in past liabilities following this ruling.

Bharti Airtel on vember 26 filed a petition with Supreme Court seeking a modification of 90-day deadline set by apex court to pay past statutory dues arising from AGR ruling.

"If, as we expect, amount Bharti is ultimately required to pay is large and needs debt funding, company's debt lever will increase, a credit negative," Moody's said.

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telecom department defines AGR as all revenue generated by telecommunications companies. telecom firms said AGR should include only revenue generated by telecommunications services. se companies typically pay government around 8 per cent of AGR as license fees and 3-5 per cent of AGR as spectrum us charges.

" (Supreme) Court's October 24 judgment indicates telecommunications companies, such as Bharti and Vodafone Idea Limited, owe government large amounts of past-due fees, including interest and penalties. court also directed telecommunications companies to clear such dues by end of January 2020," it said, adding Bharti has recorded an aggregate Rs 34,260 crore provision related to se potential liabilities.

"If Bharti and Vodafone are required to make ir payments immediately and in full, it will likely have fundamental implications for financial health and competitive dynamics of Indian telecommunications industry," it said. "But government has clearly said it can't provide any relief on AGR dues unless Supreme Court directs it to."

Without a ruling from Supreme Court that reduces amount or extends payment terms, Bharti's debt level could rise by 25 per cent if it is required to pay full payment of its aggregate provision and if Bharti funds it entirely with debt.

Moody's said increase in tariffs for phone calls and data anunced by Bharti, Vodafone Idea and Reliance Jio Ltd "will boost ir profitability and cash flow generation because a large portion of price increase will drop to ir bottom lines".

"Bharti may look to design various price increases across its subscriber base to drive a sustainable increase in aver revenue per user (ARPU) from current amount of Rs 128. Loss of subscribers or higher churn rates would offset benefits of price increases," it said.

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Assuming Bharti's higher-priced plans result in a 10 per cent increase in its ARPU for its 279 million Indian mobile subscribers, Moody's estimated company would generate an additional USD 500 million of annualized EBITDA (earnings before interest, taxes, depreciation, and amortization).

This assumes around 75 per cent of total price increase drops to bottom line, as costs will be largely limited to license fees and spectrum us charges associated with additional revenue.

To ease some of financial burden associated with low profitability of sector and high debt levels, government anunced a two-year deferment of scheduled spectrum payments to be spread equally over remaining installments beginning in March 2023.

Bharti's annual spectrum payments total around Rs 6,000 crore, which translates into around Rs 12,000 crore of payment relief over next two years.

"But deferment on spectrum is t a long-term solution. Given potential for a significant cash payment for past-due AGR fees and additional debt service costs associated with its financing, and ongoing capital spending, Bharti's Indian operations need a significant recovery to drive sustained improvement in free cash flow generation and credit metrics," it said.

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"Ultimately, Bharti's Indian operations will need to expand EBITDA materially from current level  particularly its mobile segment - to cover its cash obligations and drive sustained improvement in its credit profile."