The government's definition of telcos' adjusted gross revenue (AGR) that the Supreme Court has upheld is likely to overwhelmingly benefit Mukesh Ambani's Reliance Jio, market observers say. Reliance Jio, a relatively young company, owes only a minuscule part of the total dues of Rs 93,000 that the government is claiming as the tax on AGR of telcos.
Market leader Vodafone Idea with a 32 percent market share will be hit the worst as the Vodafone Idea will have a total license fee outstanding including interest and penalties amounting to $4 billion or Rs 30,000 crore. It will wipe out the cash reserves of $3 billion or Rs 21,000 crore of the company that has a modest Rs 12,440-crore market capitalization. The net debt is estimated at $14 billion or nearly Rs 1 lakh crore.
The verdict could lead to second-placed Reliance Jio with 29 percent market share and third-placed Airtel with just above 25 percent market share emerging as the dominant national telcos, a report on the Economic Times website said. The report quoted Rajiv Sharma, head of research at SBICap Securities, as saying: "Vodafone Idea's survival could face big challenges, given that the $4 billion dues to DoT are over and above its (existing) $14 billion net debt."
Bank of America-Merrill Lynch backed the view, saying "the question remains how Vodafone Idea will fund this payment," adding that the apex court decision would lead to "material downside risks to the company," and further "weaken the telecom sector with the prospect of increased gearing," the report said.
According to the Department of Telecom (DoT), Airtel owes it Rs 21,682.13 crore as license fees (including interest and penalties) while Vodafone Idea owes Rs 28,308.73 crore. The license fee is computed as a percentage of AGR – conventionally the revenue telcos earn from licensed mobile services.
Bharti Airtel will not need to shoulder the license fee outstandings of either Telenor India (Rs 1,950.11 crore) or Tata Teleservices (Rs 9,987.04 crore) as "it is indemnified by both the companies for their respective past dues," the report quotes Sharma of SBI Cap Securities as saying. Sunil Mittal-led Airtel has acquired Telenor's India unit, while it is awaiting DoT approval for acquiring Tata Tele's mobility business.
Financial experts say the Airtel and Voda Idea have not provisioned for such a large license fee outstanding. Instead, they have treated the dues as contingent liabilities in their books, implying these are not accounted as future payables in the form of debt/liabilities. "Airtel and Voda Idea have not created any provisions against these liabilities, and any payments, if (they) arise, will put an additional strain on their already stretched balance sheets," ICICI Securities said in a recent note, the report said. It added that Airtel and Voda Idea had "recorded contingent liabilities from DoT of Rs 9,800 crore and Rs 9,400 crore, respectively".