AGR deferment has resuscitated the idea of a three-player market: Analysts

While most brokerages have given a thumbs up to the development and suggest the provisions give some breathing space to Vodafone Idea (VI), Bharti and Reliance Jio, too, stand to gain

The government’s four-year breather to telecom companies from paying spectrum and adjusted gross revenue (AGR) has fired up the telecom stocks at the bourses in the past two trading sessions. 

While most brokerages have given a thumbs up to the development and suggest the provisions give some breathing space to Vodafone Idea (VI) – at least for four years – Bharti and Reliance Jio, too, stand to gain in case VI is unable to retain customers, improve connectivity and invest in ramping up the 5G network infrastructure in the long run.

WATCH VIDEO: What govt relief package means for telecom sector

Here’s how leading brokerages have interpreted the move.

Jefferies

The government's four-year moratorium on AGR/spectrum payments will offer VIL cash-flow relief and could lead to the government taking up a sizable stake in the company. However, Bharti's usage of its Rs 117 billion annual cash-flow relief for capex will accelerate market share shifts in its favour. We expect Bharti to gain 340 basis (bps) market share to 39 per cent over FY22-24 driving 20 per cent CAGR in India mobile EBITDA. We raise our price target to Rs 850 on higher multiples to factor potential growth acceleration. Retain Buy rating on Bharti Airtel.

CLSA

Deferred spectrum payments (interest + principal) in fiscal 2022-23 (FY23) for Vodafone Idea, Bharti Airtel and Reliance Jio would have been 44 per cent, 7 per cent and 5 per cent of their annualised Q1-FY22 revenues, respectively. Although interest will be applicable in moratorium, spectrum and AGR relief amount to $11 billion cash-flow savings over FY22-FY25 for Vodafone Idea are crucial for its survival. This major relief package and inevitable tariff hikes will improve the health of the debt-laden sector and India mobile will remain a three private player market.

Edelweiss Securities

The measures have resuscitated the idea of a three-player market for the time being. For long-term sustainability though, Vodafone Idea will require not only capital infusion, but a sizeable tariff hike for 4G pre-paid customers. In absence of this, the industry can slip towards a duopoly, which would benefit Bharti Airtel and Reliance Jio (RJio).

Emkay Global

Downgrade Bharti Airtel to Hold from Buy with an unchanged target price of Rs 730. This is based on the visibility on Vodafone India's survival for the next four years, imminent tariff hikes providing the cash-flow support for Vodafone Idea to invest in the business, which in turn could restrict subscriber losses and the recent rally in Bharti’s stock. That said, our long-term thesis still favors Bharti as we believe Vodafone Idea's survival will be in question once the moratorium ends in FY26-27E. Further, Voda Idea’s inability to invest in 5G, home broadband and enterprise businesses will also adversely affect it in the long run. That said, Bharti and Jio may not opt for the moratorium as they have comfortable liquidity position.

Motilal Oswal Securities

The moratorium helps to solve the immediate liquidity woes of Vodafone India, but its ballooning debt and payment after four years will be difficult to address. For Vodafone India, we await further guidelines on debt to equity conversion but the interest component is huge (Rs 500-550 billion) against its current market capitalisation of Rs 390 billion. Hence, the conversion of interest accrued into equity could have a significant impact on the shareholding.

ICICI Securities

In the worst case, we believe this could pave the way for Voda Idea to become majority owned by the government, thus increasing going concern visibility. Tariff hike should happen sooner, as the relief package does not fully address VIL’s cash-flow requirements. Even for raising funds, tariff hike remains critical. Bharti and Reliance Jio do not have much to gain from the relief pack, but improvement in spectrum norms will benefit during 5G spectrum auction.