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Vodafone Idea likely to find India spectrum moratorium too little, too late

Telecom companies may get only a short-term breather from the government move

Vodafone Idea took a one-time charge of $4 billion that resulted in the company clocking the worst quarterly loss in Indian corporate history during July-September.   © Reuters

MUMBAI (NewsRise) -- India's decision to allow telecom companies to defer spectrum payments offers a short-term breather to wireless carriers, but for floundering operator Vodafone Idea, the measure could be too little, too late.

After Vodafone Idea, India's biggest mobile phone company by subscribers, and rival Bharti Airtel sought relief citing their burgeoning debt, challenging market conditions, and unfavorable policies, Prime Minister Narendra Modi's administration last night offered a two-year moratorium on the payment of spectrum charges for the next two fiscal years until March 2022. The government instead asked the operators to pay the deferred amount as annual installments, along with interest, starting the fiscal year 2023.

The move offers a temporary relief to the cash flows of operators who have been starved of funds to make investments in their networks amid intense competition from rival Reliance Jio Infocomm, owned by billionaire Mukesh Ambani. Vodafone Idea and Bharti Airtel racked up a combined $10 billion quarterly loss last week, as they set aside money to adhere to a Supreme Court order that upheld a government demand seeking $13 billion in unpaid dues and interests from the operators.

The industry has been locked in a long-pending dispute with the government over the definition of adjusted gross revenue, on which they pay license charges and fees.

However, the two-year moratorium on spectrum payment may not be sufficient to avert the impact on operators from the Supreme Court order, analysts said.

The Supreme Court verdict on AGR poses a debilitating threat to Vodafone Idea, especially after recent data showed that the government estimates total dues from the company -- a joint venture between Britain's Vodafone and India's Idea Cellular --to be at about 530 billion rupees ($7.4 billion). That is 43% of its market capitalization and roughly 89 billion rupees more than what the company had previously estimated, say analysts.

For Bharti, the amount stood at around 356 billion rupees, the data showed, 13 billion rupees more than its expectations.

The government moratorium on spectrum payments will give Vodafone Idea an annual payment relief of barely 120 billion rupees, while for Bharti it amounts to 58 billion rupees.

"There is a lot more that needs to be done," Sanjay Kapoor, a former chief executive of Bharti's India and south Asia business, told CNBCTV18 about the government move. "There is an interest element to this (payment deferment), and therefore there is no respite on the profit and loss. The P&L will still look very dodgy and under pressure."

Shares of Bharti Airtel lost 2.5% in Mumbai trading on Thursday, while Vodafone Idea closed down 6.5%. The benchmark S&P BSE Sensex lost 0.2%.

"Even with the relief, the AGR dues are a drag on Vodafone Idea's equity and will affect its operations," Jefferies said in a report.

Vodafone Idea took a one-time charge of $4 billion that resulted in the company clocking the worst quarterly loss in Indian corporate history during July-September. Its British parent said it has written down the value of its investment in the Indian joint venture to zero.

Vodafone Idea's net debt at the end of September already crossed 1 trillion rupees.

Meanwhile, all the operators, including Reliance Jio, have decided to go ahead with a long-elusive price increase starting next month, more than three years after the Reliance Industries-backed wireless firm rolled out services, offering free voice calls and cut-rate data tariff.

Jio's move eroded the profitability and revenue of the industry, which had already been battling menacing price competition among more than a dozen players. Industrywide tariffs plunged to less than a cent, the lowest in the world, pushing consolidation. Currently, India has three private-sector operators besides state-owned Bharat Sanchar Nigam Ltd.

Jefferies said the companies' move to raise tariffs is a "positive," but given the high leverage, it expects Vodafone Idea's 4G rollout to be lower than its peers. It expects Vodafone Idea's market share to plunge to less than 15% by fiscal year 2021 from the current 32%.

The industry has long been demanding relief from the government in the form of a moratorium on spectrum charges as well as a cut in taxes and levies. It was also expecting a waiver on the interest and penalties on the AGR, which account for 75% of the total amount.

"The telecom companies pay up to 30% of their revenue to the government by way of various levies and taxes, which is an enormous burden on the industry," said Rajan S. Mathews, the director general of industry body Cellular Operators' Association of India.

Mathews welcomed the moratorium on spectrum payment, but said the government has to address the "vexing issue" of the AGR, and reduce the license fees and spectrum usage charges. The operators are also in the process of filling a review petition at the Supreme Court, he added.

-- Dhanya Ann Thoppil and Ujjwal Narayan

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