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The government’s relief package offers a lease of life, MOFS

According to the telecom report of Motilal Oswal Financial Services, The government announced a relief package for the Telecom sector, providing: a) a near term liquidity solution, particularly helpful to VIL, and b) addressed multiple long term issues of the sector. These measures show a strong intent of the government to address the near term liquidity of VIL. But a tariff hike is a must and VIL investment the business is a key monitorable. Bharti and RJio should reap gains from VIL’s situation and the government’s cleanup of a few legacy issues.

Addresses 80% of VIL’s near term worries, but long term fate yet challenging
VIL nearly owes INR220-230b in annual spectrum and AGR liabilities, which will now be spread over the next four years. This solves nearly 80% of its next two year’s problems. It still needs a capital infusion to address cumulative liabilities of ~INR120b over FY22-23E. Of this, INR64b is towards NCD repayments in FY22, starting Dec’21, and INR49b in FY23. Annualized EBITDA (pre Ind AS 116) of INR50b in 1QFY22 may suffice to address the interest and maintenance capex.

Is VIL likely to become a government entity? Who will be responsible for AGR?
The moratorium helps to solve the immediate liquidity woes of VIL, but its ballooning debt and annual EMI after four years will be difficult to address. Taking cognizance of this, the government has offered an option to convert the interest component accrued during the moratorium period into equity. For VIL we await further guidelines on debt to equity conversion but the interest component is huge (INR500-550b) against its current market capitalization of INR390b. Hence the conversion of interest accrued into equity could have a significant impact on the shareholding. Further, payment of AGR dues in the longer term is subject to business generating sufficient cashflow and therefore it yet needs to be addressed for VIL.

Limited direct benefits for Bharti and RJio, but multifold indirect benefits
The direct and immediate benefits for Bharti and RJio may be limited. With sufficient liquidity position, we think Bharti and RJio may not avail the moratorium on annual deferred spectrum, and AGR payments for Bharti. Also, both players could avail better rates in the market compared to the government’s higher rate of interest (MCLR+2%). It could offer multiple indirect benefits like a tariff hike. A weak third player and the government’s efforts to save VIL certainly builds a strong case for a tariff hike in the near term compared to a stronger two player market. We see Bharti/RJio gaining ~INR141b/INR180b, i.e. 22%/41%, from a 30% tariff hike and INR89b each (16%/23%) from VIL’s market share loss over time.

Valuation and view
Over the last 10 years, RoCE for the Telecom industry has been in the low singledigits. We see a strong opportunity for both tariff and market share gains for Bharti and RJio.

Bharti: We see a potential re-rating upside in both the India and Africa businesses on the back of steady earnings growth and attractive valuations. We value Bharti on a FY23E basis, assigning an EV/EBITDA of 12x/5x to the India/Africa Mobile business, arriving at a SoTP-based TP of INR840. Our estimates do not factor in any upside from tariff hikes or sharp market share gains from VIL’s financial stress, which is partly factored in our rich target multiple. We maintain our Buy rating.

RJio: We assign a rich 20x EV/EBITDA on a FY23E basis, maintaining our TP at INR1,316/share, factoring in a 34% stake sale. RJio’s value in RIL’s share comes to INR875/share (for its 66% stake). The incremental EBITDA opportunity from the consolidation could provide an impetus to valuation. RJio’s rich valuation factors in: a) its dominant position in the market, and b) its foray into digital, along with the cross-sell opportunity. However, the incremental EBITDA growth potential of INR89b would certainly offer a strong upside.

To summarise,
the government has prolonged the moratorium on spectrum and AGR liabilities for another four years, effective October 21, allowing the interest accrued during the moratorium period to be converted into equity. The Rationalized AGR definition excludes all non-telecom revenue prospectively, extends the spectrum licence period for new licences to 30 years from 20 years, and provides an auction calendar, which will aid investments in new 5G spectrum. It allows for the repatriation of spectrum following a ten-year lock-in period, allowing VIL to surrender its excess spectrum and improving spectrum availability for Bharti and RJio.

CT Bureau

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