Kick the box on the road?



Thanks to the government’s emergency plan announced last week, the short answer to this is: not for the next four years, at least. A key measure here is the moratorium on adjusted gross income (AGR) and spectrum fees for up to four years. This should bring significant relief to Vodafone Idea’s cash flow situation, giving it a break.

The street has already shown fireworks. By mid-August, weakening hopes for survival had led to a massive correction of nearly 50% of Vodafone Idea’s shares since the start of this calendar year. But with the company emerging as the primary beneficiary of the package, the stock has recovered most of that loss. Just last week, Vodafone Idea shares jumped 33%. Shares of Indus Towers Ltd, of which Vodafone Idea is one of the biggest clients, joined the party, rising 11% last week as investors took note of the reduction in the business’s going concern risk. telecommunications company. The share of its close rival Bharti Airtel Ltd reached a new high in 52 weeks of ??737 Thursday at the National Stock Exchange.

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Slip away

Analysts estimate the cash flow relief is worth around ??24,000 crores per year for Vodafone Idea, due to the moratorium on AGR and spectrum. The same for Bharti is about ??12,000 crores per year.

It should be noted here that Vodafone Idea’s huge debt burden is not reducing. “These measures may allow it to continue operating, but the lack of relief on the balance sheet or income statement may preclude any significant creation of value for equities,” analysts at Kotak Institutional Equities said in a report on September 16. The broker said, “Additionally, it could continue to lose users as it remains behind Bharti and (Reliance) Jio on network capacities (4G / 5G) and service offerings (subsidized handsets, bundled packages, etc. ). “

Other relief measures announced include the simplification of the definition of the AGR, the ease of spectrum sharing and 100% automatic FDI authorized in the telecommunications sector against 49% previously.

Of course, the package is not enough in isolation. Kunal Vora, analyst at BNP Paribas India, said: “The government’s measures are only part of the solution. the urgency has diminished, ”Vora said.

For now, companies appear to have dodged the bullet of the tariff hike. “Although indirectly, we believe that the moratorium also allows Jio to focus on acquiring subscribers without having to worry about a push from the regulator to increase tariffs (given that Vodafone Idea can survive without any tariff increase for 2-3 years), which could have otherwise impacted its subscriber acquisition as well as industry 2G users’ plans to upgrade to Jio’s network using of Jiophone / Jiophone Next, ”said analysts at JM Financial Institutional Securities Ltd.

That said, investors should note that despite the deferral of contributions, the government has protected the net present value (NPV) of contributions. In other words, the impact on government revenues will be neutral.

For Vodafone Idea, despite the respite in the medium term, the path to be covered is uneven. Over the past two years, Vodafone Idea’s revenue market share has grown from 33% to 22%. “To stem this, he must invest in his network. Protecting market share and increasing tariffs will be essential to improve free cash flow generation, ”said a report from BNP Paribas. Investors will also monitor whether the company can raise funds that can be deployed in the network.

In addition, the option to convert the total amount deferred into equity by the government could pave the way for Vodafone Idea to become a public sector unit. This would result in a significant dilution of the shares and, therefore, is undesirable for its investors. As such, the clarity and stages of converting interest on deferred payments into equity should be monitored. It can also potentially tarnish the fundraising prospects of other investors.

On the other hand, some analysts expect Bharti to gain market share. “While maintaining our estimates, we are raising our price target to ??850 per share on higher multiples for mobile and non-mobile companies in India, ”analysts at Jefferies India Pvt said. Ltd in a September 16 report. On Friday, Bharti’s action closed at ??728.

Either way, some believe that the government’s measures only postpone the troubles in the sector. Analysts from JM Financial said: “The current reforms only address the liquidity stress in the sector and do not address the high debt levels in the sector (although they prevent a future surge in leverage. through measures such as the ability to cede spectrum), with the crisis being postponed to FY26-27. “

Thus, requests from telecommunications operators to introduce floor tariffs and a reduction in regulatory levies have not been taken into account. Yes, the package insures three private companies in the sector, but the risks continue to loom. A relevant question then is whether the duopoly is still in play. Jefferies says, “Yes it is, but a little delayed.” For now, it looks like the box has been launched, and what’s more, the stock market isn’t complaining.

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