Telecom debt: There will be no AGR relief, a larger proportion of telecom debt could be converted into equity: Balaji Subramanian

Please explain the implication of the AGR issue for the telecom sector and then we will go into the details.
Balaji Subramanian: My interpretation of the entire AGR situation is that Wall 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 bright spot if the relief had been granted. Now that the relief has not been granted, these companies will not see a reduction in their AGR burden. When I say these companies, I am referring to Vodafone Idea and Bharti and that would mean that they will at least have to pay these obligations over a period of time.

As far as Vodafone’s debt is concerned, the positive aspect for the company is due to the fundraising that it is in the process of completing. They would have been able to invest Rs 50-55 billion in their network over the next three years, which would translate into reduced subscriber churn and an increase in their ARPU as their 2G subscribers could upgrade to 4G and remain on the network.

The second element concerned tariff increases. While two or three rounds of tariff increases were expected, things have gone as planned, based on the tariff increase of around 15-20% that we saw in July this year. And the third hope was the AGR relief It now seems very remote that there can be any relief with the Supreme Court rejecting the petition for relief. My feeling is that if Vodafone Idea is able to complete its debt fund raising, then the capital expenditure programme should be on track and that means that Vodafone Idea should still be able to ensure that in the next few months the loss of subscribers is stopped. Therefore, debt fund raising will be the key.

Over the weekend, you announced an equity investment agreement with three large global companies. This clearly means that the management is confident in implementing the equity investment plan. The management will implement an equity investment plan only when it believes that it is in a position to repay its debt or fund the equity investment plan. Can I see this as a positive thing?
Balaji Subramanian: Yes, this is a positive development because as you said, tying the funds is very important to ensure that the capital expenditure plan is carried out and there were also some articles saying that the plan that they had presented to the bankers around debt fundraising did not contemplate any AGR relief in the base case.

Of course, this is not something that the company has said publicly, so we don’t know. This is all based on media reports. If that were true, then it is clearly positive because, at least from a credit perspective, the AGR relief would have been the icing on the cake if it had gone through. But even if it hadn’t gone through, which is what has happened now, that would help the company raise the debt funds and move forward with the capital expenditure plan. So, it is clearly positive that they went ahead and signed these agreements over the weekend.What are the chances that the government will be able to convert all its remaining debt into equity? AGR can easily be converted into equity.
Balaji Subramanian: At the moment, the relief or reform package, which was approved by the Cabinet in 2021, allows the main part of the dues during the moratorium to be converted into equity. But considering how firm and explicit the government has been in terms of ensuring that we have a three-player market, I would not be surprised if in the future the government expands the scope of dues that can be converted into equity.

So, I would expect a higher proportion of the debt to be converted into equity in the future now that we don’t have the annualised rate reduction, so that is also a potential reduction possibility that the government can look into. When I say reduction, that will ensure that Vodafone Idea’s survival prospects in the future are not affected. But of course, a higher amount of equity conversion will also mean that the dilution to existing shareholders will be higher, so that is a possibility that the government can always explore. And the other possibility is to extend the moratorium period.

At this point, the moratorium on AGR and Spectrum payments will end on September 30, 2025, and if the government extends it to a later time, that will also mean that Vodafone Idea will get some cash flow relief. But the key word here is cash flow relief because since the liability will not be reduced, that will also mean that the payments will be higher at a later time.

What is the outlook now with this mega deal that Vodafone has signed? What does it mean for other players in terms of the pecking order: Jio, Bharti Airtel And Vodafone?
Balaji Subramanian: If Vodafone Idea’s capital expenditure programme continues uninterrupted as expected by management, the biggest relief will be for Indus Towers Because Indus Towers will be a direct beneficiary of the Vodafone Idea network rollout, so it is a clear plus point for Indus Towers. As far as other telecom companies are concerned, it will be business as usual.

Before the AGR verdict came out, they were expected to continue gaining market share in terms of revenue, but at a lower rate than what they gained in the last three to four years. I think they will continue to do so. Now, the key thing to watch is: what will be the extent of tariff increases in the next 18 to 24 months? Wall Street is preparing for another round of 15-20% tariff increases in the next 12-18 months and if there were to be another round of tariff increases after that, which is what the market increasingly seems to be pricing in judging by the stock performance of Airtel and Hexacom, then there may still be some room for improvement. So, the performance of Bharti Airtel and Hexacom would depend on whether there is a third round of tariff increases in the next 24 months or so.