Telcos may find it tough to furnish personal guarantees: SBICap Securities

Vodafone Idea will find it hard to furnish guarantees or any other form of meaningful security, except for the fact that their licence can be cancelled in case of non-payment of dues, according to SBICap Securities.

In a research report, SBICap Securities said that telcos may find it tough to furnish personal guarantees and as such, the Supreme Court is unlikely to allow for 20 years and is most likely consider a shorter timeframe which may not be good news for Vodafone Idea.

The apex court has asked private telcos to provide for security and payment roadmap in an attempt to allow telcos to repay AGR dues over a 20-year period.

"We believe that a holistic picture needs to seen as telcos need to invest in network to repay both AGR and outstanding spectrum dues," it said.

Two big observations were made by the apex court on Thursday, the report said. The Supreme Court raised concerns about demands pertaining to AGR being furnished on PSUs by the DoT, and asked the government to reconsider the aforesaid demands on PSUs.

"We believe the commentary from apex court suggests that PSUs need not pay anything on account of AGR dues and comes across as positive for them (Oil India / GAIL/ Power Grid). The demand was to the tune of Rs 4 lakh crore and such a payment would have put the PSUs in a tough spot," it said.

The second order was pertaining to private telcos, where the apex court has asked private telcos to provide with a payment roadmap and security which they need to furnish, and the timeframe to be allowed, with respect to the AGR dues payable by them.

"We don`t think that the apex court will agree to the DoT demand of 20 years in terms of repayment as telcos, particularly Voda Idea will find it hard to furnish guarantees or any other form of meaningful security, except for the fact that their license can be cancelled in case of non-payment of dues," the report said.

"Our analysis suggests that anything below 15 years for repaying AGR payments (and assuming spectrum dues remain unchanged as well), Vodafone Idea will not have money to invest in network, which will imply gradual erosion in market share," it said.

"As such, we believe that the telco will need to consider innovative solutions. Possible solutions, in our view, will be working with the government on the pending spectrum dues, and if floor tariffs can be introduced with specific timelines. Such possibilities can help Voda Idea get external investors and address balance sheet issues, in our view," the report added.

The net outstanding for Bharti Airtel and Vodafone Idea stands at Rs 260 billion and Rs 514 billion, respectively.

"While both will need to raise debt to repay the outstanding dues, Bharti, in our view, is relatively better placed and possibly could furnish bank guarantees/other possible solutions, as staggered payments will help Bharti to keep investing in the network, address market share, and even address regulatory dues. Bigger concerns seems to be around Vodafone Idea which has already suggested that it will not be able to furnish bank guarantees, suggesting it may not be easy for the telco to address the concerns raised by the apex court," the report added.

"That said, we highlight that if Vodafone Idea is asked to pay the dues upfront, it will have no other options but to shut down. Separately, we highlight that the outstanding dues for Vodafone Idea on account of spectrum are to the tune of $ 11.7 billion, much higher than the AGR dues of $ 6.8 billion," it said.

"Same is the case with Bharti, where the spectrum dues are to the tune of $ 5.7 billion, much higher than the AGR dues of $ 3.4 billion. So, any shut down, or focus purely on only the AGR dues may impact the ability of the telcos to repay the spectrum related dues which are even higher," it added.

The report said that if the 20-year time period is used by the government, both from a licence tenure perspective and spectrum lease/auctions perspective, a similar practice can be applied when it comes to AGR dues.

"That said, we don`t think that the apex court in the final hearing of the matter will allow for 20 years and it is likely to be anything between 10-15 years," it added.

Similarly, with 5G coming up as a possible upgrade for telcos, it is quite possible that telcos, not being able to invest in 5G, may lose market share and may have to take similar write offs for the investment in 4G. This points to the fact that telcos must have the ability to invest in network; and that will only be possible if regulatory dues are kept low and staggered over a longer period of time.

According to a research by Morgan Stanley, VIL has indicated to the court that it does not have the necessary funds to furnish a bank guarantee.

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The telcos and the DoT are expected to file a response within the next three days and the SC is expected to hear the case again on June 18.

As background, DoT had recommended to the SC to allow the AGR dues ex-principal to be recovered over 20 years with an 8 per cent interest rate applicable on the outstanding liabilities. The DoT also proposed that the liabilities towards interest, penalties and interest on penalties to be crystallised as on October 24, 2019 to ensure that the liabilities do not balloon from here.