Telecom Duopoly Will Be Bad For Economy
The telecom sector is fast approaching its endgame. The latest Supreme Court hearing makes it clear that there will be no easy reworking of adjusted gross revenue (AGR) dues. The discrepancy between the October calculation of what’s owed, and self-assessment by telecom service providers amounts to over Rs 82,000 crore.
There is one faint sliver of hope if the court agrees to the government’s suggestion that the dues be payable over 20 years, and calculated at a reduced interest rate of 8 percent instead of 12 percent. We’ll have clarity on that at the next hearing in April.
Even if the court agrees to this formula, it may not be enough to save Vodafone Idea (VIL). As of December 2019, VIL had over Rs 27,500 crore in debt, plus over Rs 88,000 crore in deferred spectrum liability. It has less than Rs 7,000 crore of cash on the balance sheet after paying one instalment of self-assessed dues. In Q3 (October-December 2019) Ebitda (Earnings before interest, tax, depreciation and amortisation) was just about Rs 3,400 crore. It’s hard to see how it can meet its outstandings. The parents are unwilling to throw more into a losing proposition.
The Tata Group also owes about Rs 14,600 crore over and above its self-assessed dues, while Airtel owes about Rs 31,000 crore more. Airtel can meet its dues even if it has to fork out the Supreme Court mandated amount by October. But it won’t have much in the kitty for capex. Reliance Jio has far less AGR liability but it would clearly like to ease out of the investment cycle.
If VIL goes bankrupt, the sector becomes an effective duopoly, with two private businesses, alongside the ailing PSUs, BSNL and MTNL. VIL has about 300 million subscribers, many of whom are still on 2G. There is no way that approximately 25 percent of India’s subscriber base can be instantly ported out to the Airtel and Jio networks. Jio doesn’t have a legacy 2G network so, 2G users would also have to migrate to 4G, with new handsets.
The government may choose to change spectrum allocation rules in a hurry, and sell the VIL assets at great speed and reallocate that spectrum. Or else, it will suffer the embarrassment of shutting down 300 million users.
In the event of VIL shutting down, lenders would also be in a fix until bankruptcy resolution took place. They would surely take a large haircut. The government would also not miss out on a large chunk of the claimed AGR. So there is every incentive for the government to find a way out of a mess largely of its own making. It might have to seek a legislative solution, rewriting laws to forgive part of the dues.
A duopoly would be bad for the economy. Tariffs would be hiked for sure. There would be no demand for 5G spectrum and those auctions would be postponed indefinitely. Airtel would lack the resources to invest in building more capacity on the existing network. There would be big job losses, since most of the 13,500 employees of VIL would not be absorbed.
The resulting scenario would be lose-lose for everybody. Other industries would suffer from poor quality of service. This would hurt software, entertainment, e-commerce, banking, government service delivery, IT, to name just a few telecom-dependent industries. India would fall behind in the race to induct 5G, as well as slow down the adoption of Internet of Things, etc.
Can policymakers find a pragmatic solution to stave off this pessimistic scenario? If they can, we’ll see relief rallies in April. If not, investors need to re-evaluate the survivors. Let’s assume that Airtel and Jio will eventually absorb the bulk of the 300 million VIL subscribers. Those VIL users have low average revenue per user (ARPU).
A hike in tariffs is guaranteed. But it would not necessarily lead to higher ARPU. Telecom usage is highly price-elastic. Both voice minutes and data consumption shot up when tariffs were reduced. Usage might ease down and ARPU may stagnate, if tariffs are hiked. Airtel and Jio have substantial debt. Neither is likely to be cash-flow positive for a while. BSNL is unlisted but incurring huge losses. Telecom could turn into a dead zone if there are no policy solutions to the current morass.
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