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Telecom Sector Moving Towards Duopoly, Say Brokerages

Shares of telecom player Bharti Infratel cracked up to 19 percent in morning trade on BSE on March 19, a day after the Supreme Court of India refused to offer any further relief to the telecom companies with regards to the AGR dues.

Shares of Bharti Airtel fell up to 11 percent but those of Vodafone Idea jumped up to 7 percent in morning trade on BSE.

Hearing the Department of Telecommunications (DoT) plea in the adjusted gross revenue (AGR) case, a bench of the Supreme Court of India on March 18 held that no further objections to its orders would be allowed against payable dues.

Most brokerages think that the telecom sector is moving towards a duopoly structure and Airtel and Reliance Jio are well-placed for this.

Let’s take a look at what the top brokerage think for the sector:

Credit Suisse

Global brokerage firm Credit Suisse said that SC’s rejection of self-assessment of AGR dues is particularly negative for Vodafone Idea and the company’s sustenance would remain under cloud without significant liquidity infusion.

On the other hand, Bharti Airtel would emerge as a key beneficiary of further market consolidation in a two-player scenario, Credit Suisse added.

The brokerage maintained its preference for Bharti Airtel and said its fair value could be Rs 622.

Morgan Stanley

Morgan Stanley is of the view that AGR issue could create a duopoly structure and Airtel and Reliance Jio are well placed for this.

“Due to strong balance sheets they could gain market share,” Morgan Stanley said.

The global financial firm added that the bear case for Infratel increases if tenancy deletions from Vodafone Idea accelerate.

“Vodafone Idea’s FY21 ARPU would need to be Rs 235 to be FCF break-even. The company’s debt-to-EBITDA ratio is 30 times after building in total AGR liabilities,” Morgan Stanley said.

Airtel’s debt-to-EBITDA ratio is comfortable even after assuming AGR liabilities and despite correction, Morgan Stanley sees limited positive catalysts for Bharti Infratel.

Motilal Oswal Financial Services

The brokerage highlighted that Bharti Airtel and Vodafone Idea will now have to pay the entire AGR liability toward license and SUC charges of Rs 44,000 crore and Rs Rs 58,000 crore instead of Rs 34,300 crore and Rs 44,200 crore, respectively, provisioned in Q2FY20 and the recent self-assessment figures of Rs 13,000 crore and Rs 21,000 crore.

The brokerage, however, added that in a slight relief to telcos, the SC after two weeks will hear the DoT’s proposal for a staggered payment of AGR dues by telcos over a period of 20 years at an 8 percent MCLR rate.

“In our view, Bharti should weather this storm through its recent fundraise. A duopoly market will likely benefit it (along with RJio) with incremental EBITDA potential of Rs 10000 crore in FY22 even after building in-network cost increase with blue-sky EBITDA of nearly Rs 55000 crore (on pre-Ind-AS 116),” Motilal said.

ICICI Securities

In ICICI Sec’s view, the DOT demand turns out to be much higher than provisioned by Bharti and Vodafone Idea at Rs 44000 crore and Rs 58300 crore, respectively.

“The only marginal positive is that the court has agreed to hear DOT plea for a rescue plan for telecom after two weeks,” said the brokerage.

“Our analysis of the worst-case scenario of the Supreme Court rejecting rescue plan (though low probability), Bharti has cash close to AGR balance dues, while Vodafone Idea will struggle. Bharti Airtel is our preferred pick in the telecom sector,” ICICI Sec said.

―Money Control

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