MUMBAI -- India's telecom majors Bharti Airtel and Vodafone Idea have reported a combined $10 billion in quarterly net losses after making provisions to cover to a recent Supreme Court ruling ordering two companies to pay huge fees and penalties within three months.
Singapore Telecommunications-backed Bharti Airtel's loss burgeoned to 230.4 billion rupees ($3.2 billion) for the quarter, while Vodafone Idea recorded a loss of 509.2 billion rupees, the two companies announced on Thursday. According to local daily Business Standard, Vodafone Idea's loss is the highest-ever for an Indian company.
"It is to be noted that our ability to continue as a going concern is dependent on obtaining the reliefs from the government as discussed above and positive outcome of the proposed legal remedy," Vodafone Idea said in a statement.
Bharti Airtel said it is hopeful that the government will provide some relief to the sector "given the fragile state of the industry," but still set aside 280 billion rupees to cover the penalty. "We continue to engage with the government and are evaluating various options available to us," said managing director and chief executive of India and South Asia operations Gopal Vittal.
The court ruling in October ended a longstanding dispute between the government's telecom department and the companies, with the government arguing the companies had underpaid by billions of dollars on license fees and spectrum-use charges.
Under the ruling, Bharti Airtel will have to pay 420 billion rupees in unpaid dues, while Vodafone Idea owes 400 billion rupees. Other companies, including Tata Communications and Reliance Communications, together owe roughly $8 billion.
Both companies' shares rose Friday morning compared to the previous day's close, though Vodafone Idea, which is trading at around 3 rupees, is down more than 80% from the end of last year. Bharti Airtel's shares are around 2-3% below the high it hit before the October ruling.
In remarks seen by some as an ultimatum to the Indian government, Vodafone CEO Nick Read earlier in the week called the situation "critical." The telecom major holds a 45% stake in Vodafone Idea, its India joint venture. "If you're not a going concern then you are moving into a liquidation scenario," Read said. "You don't get much clearer than that."
Such warnings, it seems, are not being ignored. The government is reportedly considering a reprieve for the companies, due to fears that newcomer Reliance Jio Infocomm -- which is not affected by the ruling -- will have an even stronger position in the market.
Reliance Jio -- owned by India's richest business tycoon Mukesh Ambani -- sparked an intense price war when it entered the market in 2016, and incumbents are still reeling.
"The ruling in favor of [the Department of Telecoms] adds further pressure and liabilities to debt-saddled incumbent operators, especially Vodafone Idea and Airtel," said Prabhu Ram, head of industry intelligence at CyberMedia Research.
Last week, the government formed committee to look into the companies' requests and, according to some local media reports, a relief package in the form of a longer repayment period and a tweak in the tax rates could be in the works.
The entry of Reliance Jio has already claimed several victims, including Aircel, the Indian unit of Malaysia-based Maxis Communications, and Reliance Communications, owned by Mukesh Ambani's younger brother Anil. Local group Idea Cellular and Vodafone's India unit had to merge to survive.
The consolidation has left three big companies -- Bharti Airtel, Vodafone Idea and Reliance Jio -- as well as the much smaller, government-owned MTNL.
The surviving companies saw profitability deteriorate sharply due to the price war. Bharti Airtel's net profit for the year ended March 2019 was about 11% what it was two years ago, while its average revenue per user fell by about half over that time.
The government's case against the telecom companies stretches back over a decade. In 1999, the government decided to let companies pay their license fees as a share of revenue, rather than a fixed amount. This move resulted in huge losses for the government, and New Delhi argued that companies were not being upfront about their earnings. The recent court ruling settles dues accrued from 2003.
Ratings agency Fitch, which is keeping Bharti Airtel on watch, said the payout could mean the company's net leverage will worsen to 3.1-3.4 times for the year ending March 2020, up from 2-2.2 times a year earlier. Bharti Airtel's net debt including lease obligations at the end of September stood at nearly 1.2 trillion rupees.
Vodafone Idea is also under pressure from the ruling. According to Morgan Stanley, the payments will raise the company's net debt-to-operating earnings ratio to 26 from 20. This would also mean the company would have to put on hold any capital expenditure plans. It had a debt of 993 billion rupees as of June.
The court ruling is likely to widen the gap in financial strength between Reliance Jio, which is unaffected, and the two older players. Analysts fear the process will kill off all competition. "Reliance Jio might be the only player left standing in the sector," Prabu Ram said.
The timing of the ruling is also worrying, as India is preparing to roll out fifth-generation mobile services. The government plans to auction spectrum in 2020, something incumbent players have already expressed concerns about.
According to Ratnam Raju Nakka, associate director at CARE Ratings, Vodafone Idea and Airtel are already investing in upgrading existing 4G networks and may not participate in 5G auctions. "Given the financial condition of incumbent players, they may keep away from the auctions. Spectrum pricing is quite high," he said.
"Although 5G can offer highly reliable, low latency and enhanced mobile broadband services, mass-scale adoption of 5G needs more use cases and development of prerequisite ecosystem such as optic fiber network," Nakka added.