Ankit Jain, Assistant Vice President, Corporate Ratings, ICRA Limited

The supreme court (SC) has pronounced its judgment on the adjusted gross revenue (AGR) case on September 1, 2020 and allowed a 10-year payment term (as against 20 year proposed by DoT) with 10 per cent upfront payment for repayment of the AGR dues amounting to around Rs 900 billion for the three telcos. As per ICRA note, this relatively shorter payment timeframe exerts additional pressure on the cash flows and necessitates sizeable average revenue per user (ARPU) increase and can have an impact on the industry structure.

The proposed payment pattern adds to the burden of the industry which was already saddled with elevated debt levels. This will also exert pressure on the cash-flows and leaves limited room for network capex and expansion, especially for the relatively weaker player. Assuming these payment terms are implemented on the balance amount to be paid, the telcos will have to shell out an amount of Rs 90 billion by March 31, 2021 as upfront payment, followed by 10-annual instalments of around Rs 120 billion at 8 per cent rate of interest starting February 2022 till February 2031.

In October 2019, the SC of India had pronounced its judgment pertaining to the definition of AGR and inclusion of some non-core revenues in AGR calculations from retrospective basis. The telecom operators pay a revenue share to the DoT in the form of license fee and spectrum usage charges which are linked to the AGR. The SC ruling mandated the operators to include some components of revenues like dividend income, rental income, forex gains, etc while computing AGR on a retrospective basis, which along with interest and penalties on the same translated into sizeable dues for the telcos, amounting to Rs 1.19 trillion for Bharti Airtel Limited (BAL), Vodafone Idea Limited (VIL) and Tata Group (Tata) combined. Of this, these telcos have already paid Rs 300 billion till date and the balance amount remains payable.

The telecom industry, after witnessing a turbulent phase with intense competition and pricing pressures, was on a path to recovery. The telecom operators announced substantial tariff hikes in December 2019, which along with moderation in capex intensity and deleveraging initiatives pointed towards greenshoots of recovery in the sector that was expected to result in expansion in cash flow generation. The tariff hikes have led to restoration of pricing power to the telcos and aided improvement in the operating metrics of the industry with growth in revenues and profit margins.

The industry has been saddled with elevated debt levels amid consistently high capex requirements. As per ICRA estimates, the debt as on March 31, 2019 stood at Rs 5 trillion, which witnessed a decline to Rs 4.4 trillion as on March 31, 2020 following the series of deleveraging measures undertook by private operators during FY2020. Moreover, despite the improvement in cash flow and moderation in capex intensity, the debt is further expected to increase to Rs 4.6 trillion as on March 31, 2021 owing to addition of AGR dues.