AGR shock for Vodafone-Idea balance sheet as promoters may not fund dues

Promoters unlikely to fund dues; telecom firm will have to raise funds on its own

The promoters of Vodafone Idea have indicated they are not liable for the Rs 28,300-crore dues imposed on the company because of the Supreme Court decision on the adjusted gross revenue (AGR) for mobile operators. This is likely to adversely impact Vodafone Idea balance sheet as the company will have to raise funds on its own books. According to the apex court judgment, telecom operators have three months to pay the AGR dues.
 
The promoters of Vodafone Idea, Vodafone PLC and the Aditya Birla group entities, are of the opinion that the liability is on the company and the promoters’ liability is now limited to the equity exposure.
 
The pending licence fee dues of combined entity of Vodafone Idea amount to nearly Rs 28,300 crore equivalent to more than a third of the company's estimated net worth at the end of June this year. According to analysts estimate, the company had a net worth of around Rs 80,000 crore at the end of Q1FY20, accounting for Rs 25,000 crore worth of rights issue and company’s net loss during the quarter. 
 
Analysts say that additional borrowings by the company to fund the AGR levy would wipe out the financial gains that accrued to the company after the rights issue. The fund infusion by the promoters post the rights issue led to a sharp fall in the company’s leverage ratio and provided it the surplus cash to fund capex for next two years. The company spent around Rs 2,840 crore on capex during the first quarter of FY20 and reported a net loss of Rs 4,874 crore in the first quarter.
 
Vodafone Idea net debt declined to around Rs 99,000 crore at the end of June this year from Rs 1.18 trillion at the end of March this year. In the same period, the company’s net debt to equity ratio improved to 1.2 times — the lowest in the past five years, from twice at the end of March this year. The company reported cash and equivalent worth Rs 21,180 crore at end of the first quarter.
 
Emails sent to Vodafone PLC and the Aditya Birla group did not elicit any response.
 
Analysts said the post the Supreme Court judgment on the AGR, the company will now have to go back to the drawing board regarding its finances.
 
“Vodafone Idea has indicated that it could also look at filing a review application if there are any technical or procedural grounds to do so. Assuming no relief comes through, the outstanding liability (and another potential large demand for past SUC (spectrum usage charges underpayment) would make the already-stressed situation even tougher for Vodafone Idea. The company may need to resort to another large equity raise round to fund these payouts. This may not be easy, however, given that the amounts we are talking about are a multiple of the company’s current market capitalisation,” said analysts, Rohit Chordia and Aniket Sethi of Kotak Institutional Equities Research.
 
“The latest AGR levy is a kind of financial shock to the company for which the company was not prepared. There is no clarity as to how Vodafone Idea will clear the dues unless they get additional equity support from their promoters shareholders,” says an analyst on the condition of anonymity. At its current stock price of Rs 4.11 per share, the company has a market capitalisation of Rs 11,810 crore, down 77 per cent from Rs 52,154 crore at the end of March this year. Fresh equity funding including rights issues are always done in a fraction of the company’s existing market capitalisation.
 
On October 24, the Supreme Court ruled in favour of the Department of Telecom (DoT) in a decades-old dispute on the definition of adjusted gross revenues (AGR).
 
Operators pay licence fee and SUC on the AGR and the dispute pertained to inclusion and exclusion of receipts from non-licensed activities like treasury income, dividend, capital gains, scrap sales, forex income, etc. and certain other items like bad debt recovery, trade/consumer discounts, rental income on infra sharing.
 
The SC has opined that the DoT’s claims on the definition of AGR as well as applicability of interest, penalty and interest on penalty are both valid and that the operators are liable to pay 100 per cent of the demand that the DoT has raised.