Amid falling revenue, rising debt, AGR compounds Vodafone and Airtel’s financial despair

Airtel and Vodafone Idea, which have been struggling to compete with Reliance Jio’s dominating presence in the market, are on the ropes after the Supreme Court verdict upholding the department of telecommunication’s interpretation of adjusted gross revenue. Prashanth Vishwanathan / Bloomberg / Getty Images
28 November, 2019

On 14 November, Vodafone Idea Limited submitted its financial filings for its quarter that ended in September this year, recording the company’s largest-ever loss of Rs 50,921 crore, a consequence of the provisioning carried out to comply with a recent Supreme Court judgment. The judgment, delivered on 24 October, triggered the Vodafone Group’s CEO, Nick Read, to comment that VIL’s future in India was in doubt due to “unsupportive regulation,” “excessive taxes” and a “negative Supreme Court decision.” After his comments made their way to India’s business newspapers, Read backtracked and blamed the media for quoting him out of context. Subsequent reports noted that Read wrote a letter to Prime Minister Narendra Modi and the telecom minister Ravi Shankar Prasad in which he reaffirmed the company’s commitment to “remain invested” in the Indian market.

Yet, Read’s concerns about his company are not exaggerated. According to aVIL media release of its filings, which broke down the results of the recent quarter, the liability accrued by the company due to the judgment amounted to Rs 27,610 crore for the license fees and Rs 16,540 crore under spectrum-usage charges, taking the total to a whopping Rs 44,150 crore. India’s second-biggest telecom player, Airtel, is in no better shape. It reportedly has to pay a sum of Rs 35,586 crore as a result of the judgment. The two major players of India’s telecom industry, both of which have suffered continuously falling revenues while struggling to compete with Reliance Jio’s dominating presence in the market, are on the ropes after the Supreme Court verdict.

The 153-page judgment, which rocked the fragile and heavily indebted telecom sector in India, concerned the interpretation of Adjusted Gross Revenue, or AGR, in the license agreement between the department of telecommunications (DoT) and telecom service providers (TSPs). The AGR represents the annual share of revenue that a TSP has to pay the central government as the usage and license fee for its operations in India. Telecom companies argued before the Supreme Court—and prior to that before the Telecom Disputes Settlement and Appellate Tribunal—that the DoT had included various sources of income within the ambit of AGR, which do not accrue from operations under the license. These include revenue sources such as income from dividend, interest income on short-term investment, discounts on calls, and revenues from other separately licensed activities. The Supreme Court shot down these arguments, upholding the DoT’s interpretation of the term, and compelling the TSPs to pay tens of thousands of crores in revenue.

Ironically, the Indian telecom industry’s heyday had kicked off with a shift to the revenue-sharing model, introduced in the National Telecom Policy of 1999. Prior to that, telecom operators were required to pay a fixed, annual license fee. But telecom operators complained that the fee was too steep, and during the prime ministerial stint of Atal Bihari Vajpayee, India switched to a revenue-sharing model.

When it was introduced, the AGR was pegged at 15 percent, which the DoT subsequently reduced to eight percent in 2013. It worked wonders for the industry, with telecom companies recording a strong upswing in revenue. From a measly gross revenue of Rs 4,855 crore in 2004, TSPs scaled up to 1.05 lakh crore by 2008. By the financial year 2014–15, this number had shot up to Rs 2.37 lakh crore. Meanwhile, a 16-year-long legal battle over the interpretation of AGR ensued. When the DoT sought the revenue share in accordance to its definition of the term, in 2003, the Association of Basic Telecom Operators and individual telcos challenged the claim before the TDSAT. The case bounced between the TDSAT and the Supreme Court before the latter finally upheld the government’s interpretation of AGR in its October ruling.

In the aftermath of the judgment, both the private telcos have been lobbying aggressively to mitigate its consequences. On 22 November, both companies filed review petitions against the judgment in the Supreme Court. Meanwhile, the government set up a committee of secretaries to examine ways to relieve the financial stress on the companies. The committee recommended a two-year moratorium on the payment of past spectrum dues, which the government subsequently approved. But the committee did not recommend any relief on the AGR payment, and according to an Economic Times report, it has since been disbanded.

According to Ram Narain, a former senior deputy director general with the DoT, the apex court judgment would adversely affect the consumers. In a post on his personal blog, published after the judgment, Narain wrote that if the telcos had paid the AGR as defined by the government from the beginning, “the companies might have passed these expenses to consumers in the form of tariffs.” He continued, “By not paying, the companies have provided cheaper tariffs for the services, giving a fillip to larger policy objective of the government. i.e. of digital connectivity ... The indirect and diffused benefits in the form of lower tariffs are more egalitarian and much better than the expenses made by the government through other welfare schemes.”

Narain added that the court’s judgment reflects a judicial tendency to punish citizens and business entities with a heavy hand, without taking cognizance of its consequences, but glosses over major acts of commission and omission on the part of government entities. It is often the case that “citizens or business entities are made to bear the loss caused to the economy and the country as whole,” he added. “The verdict of the honourable Supreme Court is as much against TDSAT and TRAI as is against the TSPs, but the hit would have to be directly taken only by TSPs and in long run indirectly by the consumers.”

As subsequent events went on to show, Narain was spot on in his assessment. In mid November, Airtel and VIL declared a hike in their tariffs from 1 December. The next day, Reliance Jio, sitting atop India’s telecom ladder, declared that it will follow suit with “appropriate increase in tariffs.” In effect, it would appear that consumers will bear additional costs due to the Supreme Court’s judgment.

Soon after its launch, Reliance Jio had launched a disruptive tariff war, which allowed it to establish its dominance in the market, while Airtel and VIL’s finances took a beating. Over the years, VIL and Airtel have recorded a consistent fall in revenue and a corresponding rise in debt. For instance, Airtel’s consolidated revenue in the quarter ending September 2016—when Reliance Jio launched—stood at Rs 24,652 crore, which fell to Rs 21,131 crore in the September 2019 quarter. To put this in context, Airtel’s losses for the quarter stood at Rs 23,045 crore, or Rs 1,914 crore higher than its revenue. It posted a consolidated loss of Rs 2,866 crore for the June quarter against a net profit of Rs 97 crore posted the previous year and a net profit of Rs 2,113 crore in the quarter ending June 2015.

In terms of their respective debts, both the companies are heavily burdened. VIL’s net debt has already crossed one lakh crore and its gross debt is close to Rs 1.18 lakh crore. In the latest quarter, Airtel declared a similarly desperate situation, with a net debt of Rs 1.18 lakh crore.

In fact, it is also important to consider that the increased burden on the operational revenue of VIL and Airtel does not bode well for Indian banks, which are already battling with non-performing assets that stood at an estimated Rs 9.4 lakh crore in March 2019. As of September 2019, the total exposure of banks to the telecom sector stood at a massive Rs 1.15 lakh crore. In September 2016, this figure was Rs 770 crore—the numbers today mark a rise of 14,835 percent. Many of India’s largest private- and public-sector banks have sizeable stakes in the telecom war: the State Bank of India has an exposure of over Rs 37,330 crore, followed by HDFC bank with Rs 24,515 crore, and then by Axis Bank at Rs 17,135 crore.

In a press release issued on 29 August this year, India Ratings, a credit-rating agency, presented an unpromising mid-year outlook on the telecom industry. Itstated: “The aggregate gross debt of Voda-Idea, Bharti (India business) and RJio at end-FY19 stood at INR 3.9 trillion, implying gross leverage of over 8x for the sector. The liquidity profiles of India telcos are structurally weak as free cash flows are likely to remain negative over FY20-FY22 due to high capex intensity (INR1.2 trillion in FY19).” Simply put, it means that the Indian telecom sector’s cash flow is likely to remain negative for the next two financial years because the companies will have to incur expenditure on building and sustaining capital infrastructure.

Airtel and Vodafone Idea’s financial despair appears likely to continue. I asked Narain what the telcos could expect from the Supreme Court in their review petitions. “If no review comes in for the relcos, then it will be a precarious position for both of them, particularly for Vodafone Idea,” he said. “In any case, both these companies are heavily leveraged. Even Bharti Airtel will not be able to sustain for a very long time, if it does not raise tariffs. The brunt will ultimately be burdened by the customers.”