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Ankit Jain
Assistant Vice President
ICRA

AGR Issue Casts A Significant Degree Of Uncertainty On The Telecom Industry

The telecom industry had been facing severe headwinds in the past, led by intense competition and pricing pressures amid elevated debt levels. The current fiscal witnessed green-shoots of recovery primarily on the back of steady ARPU improvements, deleveraging initiatives, and moderation in CapEx intensity. However, a cloud of uncertainty has come to hang on the industry owing to the adjusted gross revenues (AGR)-related dues that are required to be paid as per the Supreme Court (SC) order, although the industry had announced steep tariff hikes in December 2019.

The industry went through a turbulent phase over the last few years, with intense competition leading to pressures on revenues and profitability, resulting in one of the steepest falls in the industry ARPU. The industry AGR declined to Rs 30,213 crore in 3QFY2020 from Rs 36,133 crore in 3QFY2017. However, the current fiscal witnessed some stabilization of ARPU levels post the introduction of minimum recharge plans and upgradation of subscribers from 2G to 4G, resulting in improvement in industry AGR. Further, the telecom operators announced steep tariff hikes effective December 2019, first of its kind in a long time, which is expected to result in restoration in pricing power to the telcos. ICRA expects these hikes to lead to improvement in the operating metrics of the industry leading to a revenue growth of 18 percent, while the industry OPBDITA is expected to grow by 21 percent to Rs 75,000 crore in FY2021. Moreover, ICRA does not expect any major impact of the ongoing nationwide lockdown due to COVID-19 on telecom services. The pressure on revenues on account of limited customer addition, along with lack of physical recharges, is moderated by the increased mobile usage on account of work from home regime as well as content viewing, in addition to shift toward digital recharges.

The industry, however, remains saddled with elevated debt levels. The private telecom operators undertook deleveraging measures during FY2020, resulting in moderation in debt levels to Rs 4.4 lakh crore as on March 31, 2020, from Rs 5 lakh crore as on March 31, 2019. Moreover, the industry has other plans like monetization of stake in tower and fiber assets, which are on the anvil for some operators.

Amid the attempts by the telecom operators to reduce their debt levels, the SC order on October 24, 2019, pertaining to inclusion of some non-core revenues in AGR calculations from retrospective basis, adds to the woes of the industry. The latest hearing from SC mandates that the telcos will have to make the entire payment to the DoT, which is around Rs 1.19 lakh crore for Airtel, VIL, and Tatas. Out of this, the telcos have already paid around Rs 29,000 crore, while the balance Rs 90,000 crore remains to be paid. The DoT has filed a plea for elongation of the payment period to 20 years, which is still pending consideration of the SC. Thus, there remains a considerable degree of uncertainty on the timelines, and thus funding of these payments. A 20-year payment plan as proposed by DoT results in annual payment of Rs 9150 crore for the industry and dampens the financial succor provided by the deferment of the auction instalments for 2 years, to some extent. Moreover, immediate payment of the entire dues can have a long-lasting impact on the industry structure, has the potential to delay the recovery attempts, and will weigh heavily on the balance sheet of the industry.

Furthermore, the debt is further expected to increase in FY2021 to Rs 4.6 lakh crore, despite the moderation in CapEx intensity and improvement in cash-flow generation as the telcos will have to make AGR payments, either full or in staggered installments. Thus, the debt coverage indicators are expected to continue to remain weak with total debt/OPBDITA of more than 6x and interest coverage of around 2x for FY2021.

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