AGR verdict: Telcos' broadband strength likely to be hit, say analysts

Bharti Infratel has already taken a hit from smaller telcos shutting shop over the past two years

Last week’s Supreme Court (SC) verdict on adjusted gross revenue (AGR) of telcos can have a larger impact on the broadband network strength of operators, noted analysts, saying the payment will impact their ability to spend on tower tenancy.

As of last week, the SC gave telecom companies three months to comply with its order, upholding the government’s definition of AGR and asked them to file a compliance report after depositing the money.

The SC had on Thursday said there would be no extension of deadline. It had also said telecom companies would have to pay the fine and penalties, apart from the AGR dues. The payout by telcos could rise to an estimated Rs 1.33 trillion once spectrum usage charges linked to AGR are taken into account.

Bharti Infratel, a leading tower operator, has already taken a hit from smaller telcos shutting shop over the past two years. Infratel has had almost 47,000 net tenancy deletions over the past two years. This was largely driven by tenancy rationalisation from Vodafone Idea. It tried to cut costs to improve profitability, along with lower additions from Jio, as it set up its own tower capacity.

“The recent SC ruling could not only affect future tenancy additions, but also impinge on existing tenancies (especially of Vodafone Idea); Jio also announced a near completion of its wireless capital expenditure cycle as it neared 99 per cent population coverage,” noted Parag Gupta, research analyst, Morgan Stanley.

Jio has already shifted focus to building its own towers. With every tenancy loss at a tower, there is loss of rental revenue from the tower, which is partially offset by an increase in rental of the remaining operators on the tower, if any. But rental costs of the tower real estate do not change at a similar pace. Operational costs of towers also remain the same, irrespective of the number of tenants. Thus, every telecom operator exit impacts revenue and the earnings before interest, tax, depreciation, and amortisation of the tower company.

“Vodafone Idea had raised Rs 25,000 crore through a rights issue, which concluded in May 2019 and the bulk of proceeds are supposed to be used for 4G network expansion. Any large one-off payment might impact Vodafone Idea’s ability to strengthen its network,” wrote Kunal Vora, research analyst, BNP Paribas. At present, the rapid expansion of the 4G network across the country is the key offering that telcos are banking upon to boost sector revenue.

Vodafone Idea has reduced its network sites by almost 80,000 since the merger of Vodafone India and Idea Cellular in 2018. After the equity-raising by Vodafone idea, it was expected that the Vodafone Idea business for Infratel will stabilise in the near term and increase in the medium term. However, any significant one-time outflow could further stress Vodafone Idea’s balance sheet and this, in turn, would adversely impact the tenancy outlook, noted Vora.

A large payment could potentially impact Vodafone Idea’s ability to strengthen its network and compete effectively in the market. In that case, Bharti will be well-positioned to improve its revenue market share. For the tower company as well, the return on capital employed is not attractive with a single tenant. Thus, the viability of the two main tenants is critical for Infratel.

Around Rs 50,000 crore of the Rs 92,641-crore amount dues are owed by the existing private telecom operators in the industry — Vodafone Idea owes Rs 28,308 crore, Airtel owes Rs 21,682 crore, while Reliance Jio, the newest entrant, owes Rs 13 crore to the Department of Telecommunications, according to initial estimates.