AGR dues: Jio, Bharti Airtel likely to gain market share on Supreme Court's verdict, says Fitch Ratings

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The rating agency says that the third largest telco Vodafone Idea will gradually lose market share given its weak balance sheet and limited financial flexibility

The Supreme Court’s decision to allow telcos to pay outstanding adjusted gross revenue (AGR) dues over 10 years from April 2021, will not be enough to help struggling third-largest service provider Vodafone Idea Ltd to stabilise its position and market leaders Reliance Jio, a subsidiary of Reliance Industries, and Bharti Airtel are expected to increase their market shares, says Fitch Ratings.

Fitch says that Vodafone Idea will gradually lose market share given its weak balance sheet and limited financial flexibility. It is expected that industry tariffs to rise as users adopt higher-price 4G plans. Jio, which was unaffected by the court's ruling, is likely to strengthen its market leadership with further subscriber gains, said the rating agency.

“We expect Jio and Bharti to increase their combined revenue market share to 75-80 percent from around 70 percent in the next 12-18 months, at the expense of Vodafone Idea, which will likely lose 50 million-70 million subscribers in the next 12 months; it lost about 155 million subscribers in the last nine quarters. We believe Jio could snap up more than half of Vodafone Idea's subscriber losses, with the balance going to Bharti,” said Fitch Ratings.

Jio reported EBITDA growth of 55 percent, while Bharti reported Indian mobile EBITDA growth of 35 percent in the first quarter of the year ending March 2021 (FY21), but Vodafone Idea's quarterly EBITDA has been stagnant at $200 million-$230 million, which covers only half of its interest cost.

Vodafone Idea's auditor expressed material uncertainty over the company's ability to continue as a going concern, which, the auditor said, depends on successful negotiations with Vodafone Idea's lenders to waive their rights to repayment after breaches of covenants under its bank loans, said the rating agency.

Vodafone Idea's plan to raise about $.4 billion through a mix of equity (not exceeding $2 billion) and debt is unlikely to restore its competitive position and reverse subscriber losses, because the amount would not be sufficient for capex.

At end-June 2020, it had a cash balance of $470 million, which was well short of short-term debt maturities and guarantees of $3.6 billion. It has so far paid about $1.1 billion of its total unpaid dues of $8.9 billion, and it will need to pay around $1-1.2 billion a year during FY2021-2031.

The Supreme Court's latest ruling will allow Bharti to pay the remaining outstanding dues in 10 annual payments of about $600 million starting March 2022 instead of a lump sum, said Fitch rating.

“It has paid $2.4 billion of the total $6.4 billion in unpaid AGR dues, and we have factored in the balance into our leverage calculation for FY21. We forecast Bharti's FY21 FFO net leverage to be 2.1x-2.4x (FY20: 2.1x), below 2.5x, the threshold above which we may consider negative rating action, as higher tariffs and an increasing subscriber base will offset the AGR payments,” it said.

Bharti's FY21 Indian mobile EBITDA is likely to improve by 30-40 percent, supported by a wider EBITDA margin following tariff hikes and 5%-6% subscriber growth. Fitch expects Jio's FY21 mobile revenue to increase by 45-50 percent, led by higher monthly average revenue per user (ARPU) and subscriber additions of about 40 million (FY20: 80 million).

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