Explain the implication of the AGR issue for the telecom sector and then we will get into the specifics.
Balaji Subramanian: My reading of the entire AGR situation is that the Street was expecting a favourable outcome and that would have been positive for the companies, especially Vodafone Idea. For Indus and Bharti, it would have been a small positive if the relief had come through. Now with the relief not coming through, these companies will not see a reduction in their AGR burden. When I say these companies, I refer to Vodafone Idea and Bharti and that would mean that at least they will have to pay these liabilities over a period of time.
Now as far as Vodafone’s debt raise is concerned, the positivity around Vodafone was one through the fundraise that they are in the process of completing. They would have been able to invest Rs 50,000 to 55,000 crore on their network in the next three years and that would result in their subscriber loss coming off and their ARPU also going up because their 2G subscribers would be able to upgrade to 4G and stay back on the network.
The second element was on the tariff hikes. While two or three rounds of tariff hikes were expected, things have been going as per plan based on the tariff hike of around 15-20% that we saw in July this year. And the third hope was the AGR relief coming through. Now it looks very remote that there can be any relief with the Supreme Court turning down the curative petition. My sense is if Vodafone Idea is able to complete its debt fundraising, then the capex programme should be on track and that means that Vodafone Idea should still be able to ensure that over the next few months the subscriber loss is arrested. So, the debt fundraising will hold the key.
Over the weekend, they have announced a capex tie-up with three global majors. It clearly means the management is confident of rolling out the capex plan. The management will roll out a capex plan only when they think they are in a position to service their debt or fund the capex plan. Can I look at it positively?
Balaji Subramanian: Yes. That is indeed a positive development because as you rightly said, tying in funds is very critical in terms of ensuring that the capex plan goes through and there were a few articles also which said that the plan that they had submitted to the bankers around their debt fundraising, those plans did not factor in any AGR relief in the base case.
Of course, this is not something which the company has publicly said, so we do not know. This is all based on media reports. If that were to be true, then it is clearly a positive because at least from a lending perspective, the AGR relief would have come as a cherry on the cake if it had come through. But even if it had not come through, which is what has now turned out to be, that would help the company to still raise the debt funds and go ahead with the capex plan. So, it is a clear positive that they have gone ahead and signed these deals over the weekend.What are the chances that the government can convert their entire remaining debt into equity? The AGR can easily get converted into equity.
Balaji Subramanian: Right now, the relief or the reform package, which was approved by the Cabinet in 2021, lets the principal part of the dues during the moratorium to be converted into equity. But considering how firm the government has been and vocal the government has been in terms of ensuring that we have a three-player market, I would not be surprised if the government in future expands the scope of the dues that can be converted into equity.
So, I would expect a higher proportion of the debt to be converted into equity going forward now that we do not have the AGR relief coming through, so that is also a potential relief possibility that the government can come up with. When I say relief, that will ensure that the survival prospects of Vodafone Idea in future do not get impacted. But of course, a higher extent of equity conversion will also mean that the dilution for the existing shareholders will be higher, so that is one possibility that the government can always explore. And the other possibility is to extend the moratorium period.
Right now, the moratorium on the AGR and Spectrum payments will end on September 30th, 2025, and if the government is extending that to a later point in time, that will also mean that Vodafone Idea gets some cash flow relief. But the operative word here is the cash flow relief because since the liability is not going to reduce, that will also mean that the payouts will be higher at a later point in time.
What is the outlook now with this mega deal that Vodafone has inked? What does it mean for other players in terms of the pecking order – Jio, Bharti Airtel and Vodafone?
Balaji Subramanian: If the capex programme of Vodafone Idea goes on uninterrupted as the management was expecting, the biggest relief will be for Indus Towers because Indus Towers will be a direct beneficiary of Vodafone Idea’s network rollout. So, it is a clear positive for Indus Towers. As far as the other telcos are concerned, it will still be business as usual.
Before the AGR verdict had come in, they were still expected to continue gaining revenue market share but at a lower extent as to what they were gaining in the last three-four years, I think that will still continue. Now the key thing to watch out for is, what is the extent of tariff increases in the next 18-24 months? The Street is building in another round of 15-20% tariff increase in the next 12 months or 18 months and if there were to be another round of tariff increase after that, which is what increasingly the market seems to be factoring in going by how the Airtel and Hexacom stocks have performed, then there can still be some upside. So, the performance of Bharti Airtel and Hexacom would depend on whether there is a third round of tariff hike in the next 24 months or so.