Bharti Airtel to gain at the expense of Vodafone Idea, say Brokerages

Telecom czar Sunil Bharti Mittal-led Bharti Airtel may consolidate its position at the expense of Vodafone Idea Ltd as it has better balance sheet strength to deal with the eventuality of having to pay past statutory dues in case the Supreme Court rejects their review petitions, brokerages said.

Airtel and Vodafone Idea have filed separate petitions in the Supreme Court seeking review of the October 24 order of the apex court that held them liable to pay statutory dues for past 14 years after including non-telecom revenue in their annual adjusted gross revenues (AGR). The dues totalling Rs 1.47 lakh crore for the industry are to be paid within three months of the order.

"The liabilities are large at $4.8 billion for Airtel and $5 billion for Vodafone Idea, and if the Supreme Court were to dismiss the review petition causing the entire liabilities to devolve, it would be a negative development for Airtel but even more serious for Vodafone Idea which may find it difficult to fund these liabilities before January 24, 2020," Morgan Stanley said in a report.

This, it said, "could potentially lead to further market share consolidation in the industry thereby strengthening Airtel's positioning in the industry." The two firms have been lobbying together with the government for relief on payment of the statutory liabilities.

Bharti Airtel's board has already approved raising $3 billion through a combination of equity ($2 billion) and debt ($1 billion).

"In our view, this fundraise is primarily to take care of the worst-case outcome wherein the entire AGR dues become payable," it said. "However, if part of the AGR liabilities were to be waived and/or were paid over a period of time, then the company could use the proceeds for repayment of existing debt. In either case, we see Airtel's balance sheet strength as a differentiating factor in the industry." Goldman Sachs said it hosted Mittal, founder and Chairman of Bharti Enterprises - the holding company of Bharti Airtel, on December 5.

"Mittal shared his thoughts on various aspects of the telecom business, including his outlook on industry structure and tariffs, the potential outcome of AGR liability, and his views on Bharti Airtel's balance sheet and the company's non-wireless subsidiaries, among other things," it said.

The meeting, it said, "reinforces our constructive view on Bharti Airtel, with potential upside risk to estimates from higher-than-expected tariff hike and market share gains from Vodafone Idea," it added.

Bharti Airtel expects industry revenues to start growing again due to recent tariff hikes, and expects industry revenues to surpass $50 billion (timeline unspecified) as opposed $30 billion at present, per company.

"In the event of any market share re-allocation in the industry, Bharti Airtel believes it is well-positioned to capture 50 per cent or more of the incremental market share; per company, incremental revenues can come at a very high EBITDA margin," Goldman Sachs said.

The company saw a low possibility of a new player entering the India telecom market.

Morgan Stanley said the recent tariff hike announcements by all three operators is a step in the right direction towards self-repair. "While the transmission of these hikes into average revenue per user (ARPU) increases will take some time (as the new tariffs are applicable only on the next recharge and there is a possibility of downgrading to lower value packs), we believe FY21 ARPUs will nonetheless likely see substantial improvement," it said.

It saw a possible ARPU path towards Rs 180-200 over the next few years which is not insurmountable as per user earnings were at Rs 200 in FY15.

"Such large increases will be required for Vodafone Idea along with other government relief measures to bring down its leverage position to more sustainable levels," it said.

Before Reliance Jio entered the industry in 2016, Bharti's ARPU was around Rs 200 per month, and the company believes it can get to similar levels over the next few quarters, with levels of close to Rs 300 per month over time, Goldman Sachs said.

"Return on capital in India telecom remains low, and per the company, ARPUs need to go up for this metric to improve; Bharti believes this is true even for competition. Bharti Airtel believes it can get to 35 per cent or more revenue market share over time, from about 32 per cent at present," it said.

According to the brokerage, Bharti Airtel believes that while its current debt levels are elevated, it remains under control.