Vodafone-Idea's fate hinges on the Supreme Court's AGR verdict today

For Vodafone Idea Ltd (VIL), the future course is closely pegged to today’s Supreme court decision on the issue of tenure of payment of adjusted gross revenue (AGR) dues.

In the last hearing, held in July, the court had ended some confusion by clearly telling VIL and other operators that there would be no reassessment of the AGR dues calculated by the department of telecommunications (DoT). Operators had earlier claimed, based on their self-assessment, that the payable amount should be far less.

What now needs to be decided is the timeline for AGR repayment. VIL, which had earlier sought a 20-year period, had changed this to 15 years in the last court hearing.

VIL’s future as a going concern, as it has admitted in its results for the June quarter of 2020-21, will be crucially dependent on today’s SC decision. In its call with analysts, too, the company had made it clear that it would decide on its funding requirement only after the court verdict.

Look at these numbers to understand the depth of VIL’s financial problems: Its AGR dues as fixed by DoT are Rs 58,200 crore (the highest among all telecom companies). Of that, VIL has so far managed to pay only Rs 7,900 crore. By comparison, Bharti Airtel, whose total dues are to the tune of Rs 44,000 crore, has only Rs 26,200 crore still left to be paid.

If the Supreme Court decides on a 10-year repayment tenure, it would clearly be a big challenge for VIL, which already steeped in debt. The company has to fork out a total of Rs 30,000 crore for AGR dues, deferred spectrum payments, non-spectrum interest, and capital expenditure.
It will need to pay Rs 7,500 crore annually (at 8 per cent annual interest) for AGR dues. But it also has to shell out Rs 14,000 crore as deferred spectrum payments every year from 2022-23 (the government has given it a two-year moratorium). And, of course, it has to put Rs 6,500 crore as capex to stay competitive in the game, and also pay out Rs 2,200 crore in non-spectrum interest annually.

To be able to make this kind of expenditure and stay afloat, it will require higher tariffs, average revenue per user (ARPU) to shoot up substantially, fresh cost savings, and an equity capital infusion.

Goldman Sachs estimates suggest that VIL’s ARPU needs to go up by 87 per cent from the current level (Rs 124 in the June quarter) and its earnings before interest, tax, depreciation and amortisation (Ebitda) must increase to 4.9 times that in the June quarter. That is a tall order, even though it is looking at making cost savings of over Rs 4,000 crore in the next 18 months.

If the Supreme Court fixes a 15-year repayment schedule, Vodafone-Idea will still have some pain but that will surely be less. Its AGR bill will come down to Rs 5,900 crore. Goldman Sachs says, in that scenario, the company’s ARPU will need to go up by 43 per cent, but Ebitda will still have to be 4.7 times that in the June quarter.

Goldman Sachs says the company should be able to manage its liquidity till 2021-22 if tariffs go up and some of its divestments go thorough. That is primarily because of the two-year moratorium it has got on spectrum payments.

But there are challenges in the 15-year scenario, too. Tariffs are surely expected to go up — even Bharti Airtel has said it expects it have an ARPU of Rs 300. But for a company that has lost subscribers (11 million in a quarter that saw rival Reliance Jio adding similar numbers), especially data users who pay more (4 million lost), seen its ARPU falling by 6 per cent and revenues by 5 per cent, a steep tariff hike leading to improved ARPU seems challenging.

Even if Vodafone-Idea did increase tariffs (like last December, when these were upped by 25 per cent), the speed at which it is losing customers would actually lead to a fall in its average ARPU, as was seen in the June quarter.

Even its tower monetisation attempts have had to be postponed due to a fall in the value of its business in Indus Towers, which was to merge with Bharti Infratel. Sources say Bharti is unwilling to pay the price which it had earlier committed to VIL for its 11.15 per cent stake in view of an erosion in tenancy. Besides, the valuation of the company will depend on whether VIL remains a going concern. The tenancy ratio would otherwise fall to 1x. Analysts say, even if that happens, VIL will not get more than Rs 4,000 crore for the deal.

It is also looking at monetising its fibre business, but even that would not be enough for the task. At a call with analysts recently, VIL said it would look at raising funds. Most agree that it has no choice except raising more equity or getting a new partner. That, however, would depend on whether its shareholders are willing to give it another shot at survival.

All eyes today, meanwhile, are on the Supreme Court.