We had shared in Airtel’s ICR dated 13th March 2020 that the telcos had almost lost the 15-year old legal battle regarding AGR dues when Supreme Court (SC) ruled in favour of Dept. of Telecommunication (DoT). However, the telcos were waiting for the final judgement hoping they get some rebate on dues and more importantly an extended timeline (15-20 years) to clear pending dues.

On 2nd September, SC came out with the final verdict directing the telcos to make an upfront payment of 10% of the AGR dues by March 31, 2021 and the remaining dues in 10 annual instalments starting FY22. The telcos are entitled to file a review/curative petition against this ruling within a month from judgement date and if lucky they might get some rebate on dues or extension in the repayment timeline.

While Bharti Airtel has already paid Rs 18,000 Cr out of the total demand of Rs 44,000 Cr. i.e. 40% of total dues, it is not yet clear whether the upfront 10% would be applicable to Bharti or not. There is also a confusion whether 10% upfront is of total dues or remaining.

We are assuming SC has asked 10% of ‘remaining’ dues and over & above what’s already paid. This would imply payment of Rs 2,600 Cr by Airtel by end of FY21 while the remaining dues of about Rs 23,400 Cr would be paid in 10 annual instalments of around Rs 3,500 Cr assuming an 8% interest rate as suggested by DoT.

At around Rs 7,000 Cr, the annual AGR related cash outflow by Vodafone-Idea is going to be double than that of Airtel’s and higher than Voda’s current annualised operating profit. In addition to AGR dues, it owes about Rs 90,000 Cr to govt. as deferred spectrum liabilities and about Rs 50,000 Cr to financial institutions. In order to just break-even at cash flow level, Voda would have to at least double its ARPU from current levels of Rs 120.

Whether or not Voda survives, a sustained industry-wide uptrend in ARPU is going to be extremely beneficial for both Airtel and Jio. We remain positive on the thesis and Airtel continues to be on our buy list. If you are under-allocated, you may add upto 5% of the portfolio.

For more on AGR, please refer ICR: https://investor.stalwartvalue.com/stock_reports/3330?presentation_mode=on#/51