Voda Idea tanks 39% on AGR blow but Airtel jumps as analysts remain bullish

Shares of telecom companies, including Bharti Infratel and Vodafone Idea, and banking firms such as IndusInd bank and YES Bank, were trading actively at the bourses on Friday after the Supreme Court Thursday rejected the review petitions moved by Bharti Airtel, Vodafone Idea and Tata Teleservices against its October 2019 order on payment of dues linked to adjusted gross revenue (AGR). With this, the telcos will have to together pay an estimated Rs 1.47 trillion in AGR dues that include penalties and interest on penalties by January 23.

In the early deals, Vodafone Idea plunged 39.3 per cent to hit a low of Rs 3.66 on the BSE. A total of 264.17 million shares changed hands on the BSE and NSE till the time of writing of this report. Vodafone Idea, which has to pay out a total AGR dues of Rs 53,038 crore said, ‘’the company is exploring further options, including filing of a curative petition.’’

Brokerage firm Citi, in its latest report, said that situation for Vodafone Idea "remains precarious" given that the liability equates to more than 2x to its current market cap. Meanwhile, according to estimates by Credit Suisse, net debt of Vodafone Idea could escalate to over 8x. 

"The verdict may put a severe burden on telcos and have unconceivable repercussions, particularly against the backdrop of Vodafone Idea facing a risk of shutdown (it may result in Rs 1.2 lakh crore debt default, large-scale job losses and subscriber churn," said analysts at MOFS.

They, however, pin hopes on goverment intervention to save the telecom firm. 

"Centre has to recover INR900 b as deferred spectrum debt from VIL, which has stated it will shut operations if asked to pay the entire AGR liability. Also, VIL owes INR300b to banks (against this, Aditya Birla Group and Vodafone Plc’s stake in VIL stands at a mere INR70b and INR80b, respectively). Moreover, the implication on end-customer in the advent of VIL shutdown could be terrible. In such a scenario, we believe that the government may look to exercise other options," they said.

That apart, Bharti Infratel slumped 13.17 per cent to Rs 210.85 on the BSE.  Analysts at Edeweiss Securities maintain 'hold' rating on the stock (target price Rs 293), given thaat it is trading at 6.6x FY21E EV/EBITDA.

Bharti Airtel, on the other hand, gained up to 5.1 per cent to hit a 26-month high of Rs 498.65 on the BSE. So far, about 12.6 million shares have changed hands on the counter on the NSE and BSE. Analysts remain positive on the stock after it managed to raise $2 billion (approx. Rs 14,000 crore) through the QIP route.

"Bharti Airtel has sought relief on AGR liability but also prepared itself with a plan-B by raising nearly Rs 14,000 crore during the past week by way of QIP and FCCB (Rs 700 crore). The balance Rs 13,000 crore could be funded by bank loans. Bharti’s present net debt stands at Rs 89,000 crore with EBITDA of Rs 40,000 crore in FY21 (net debt to EBITDA of 2.2x). So, incremental Rs 13,000 crore would still keep net debt manageable at Rs 1,02,000 crore with 2.6x net debt to EBITDA," said analysts at Motilal Oswal Financial Services. 

They further added that given the adverse situation for Vodafone Idea, Reliance Jio and Bharti Airtel could "gain disproportionately".

"Thus, irrespective of an adverse ruling, Bharti has best hedged position even if it is required to pay the AGR liability. Assuming subscriber share of 70:30 for RJio/Bharti, both telcos could see EBITDA addition of INR240b/100b with 70% margin, implying a jump of 55 per cent/20 per cent," they said.

Analysts at BofA-ML and Edelweiss Securities, too, maintain buy/positive stance on the stock. 

"Given sufficient cash on its books, Bharti Airtel would be able to repay the dues and thus gain market share from competitors... While Bharti Airtel will have to now shell out INR340bn, it would be net-positive since revenue would spike without a concomitant addition of costs," said analysts at Edelweiss Securities. 

They added: In the absence of any government intervention, the market would turn into a duopoly benefitting incumbents Bharti and JIO.  Bharti Airtel is trading at 7.2x FY21E EV/EBITDA, thus we maintain ‘BUY’ on the stock with a target price of Rs 533.

Disappointed with the decision, Bharti Airtel, which is facing an estimated AGR demand of Rs 35,586 crore said it was evaluating filing a curative petition, which is the last judicial resort available for redressing grievances.

A collapse of Vodafone Idea, however, could erode Bharti Airtel’s value in its subsidiary Bharti Infratel as Vodafone Idea is a large customer for Bharti Infratel.

According to analysts at SBICAP Securities, a decline of Vodafone Idea will accentuate tenancy losses and pressure on profitability. “Bharti Infratel contributes about 12 per cent of estimated FY20 consolidated Ebitda for Bharti Airtel and around 8 per cent of the fair value ascribed to Bharti Airtel," they said.

“The industry continues to face severe financial stress and the outcome could further erode the viability of the sector as a whole. The industry needs to continue to invest in expanding networks, acquiring spectrum and introducing new technologies like 5G,” Bharti Airtel said.

FINANCIALS TANK

Banking counters, including YES Bank, IndusInd Bank, State Bank of India, and IDFC First Bank plummeted at the bourses today given the huge exposure to the telecom sector. According to industry estimates, telcos owe nearly Rs 1.3 lakh crore to banks. 

IDFC First Bank, YES Bank, and IndusInd Bank have exposures between 8 and 12 per cent of networth to Vodafone Idea. Shares of IDFC First bank slipped 8 per cent to Rs 41.4 on the BSE, YES Bank tanked 6.8 per cent to Rs 37.2, and IndusInd Bank was down 4.9 per cent to Rs 1,317.4 on the BSE. 

Besides, SBI and Punjab National Bank, that have exposure up to 6 per cent of the networth, declined 3.8 per cent and 3.2 per cent, respectively.

According to estimates by brokerage firm Nomura, SBI's exposure at Rs 14,000-15,000 crore is 0.65 per cent of its H1FY20 loan book. "The net imapct would come in at Rs 5,000-7,000 crore, which should be manageable for SBI," it said.