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Voda’s pain, Bharti’s gain! Why is Airtel rallying despite big Q2 loss?

Airtel will be in a position to take up nearly 40 per cent of the ground ceded by Vodafone Idea.

Updated: Nov 16, 2019, 05.03 PM IST
Will AGR issue force telecom sector to move towards duopoly?
Will AGR issue force telecom sector to move towards duopoly?
NEW DELHI: Vodafone Idea and Bharti Airtel reported a combined loss of Rs 74,000 crore on Thursday, the biggest ever for both telecom firms, as they made provisions following the recent Supreme Court ruling on adjusted gross revenue (AGR).

But shares of Bharti Airtel climbed 9 per cent to hit a high of Rs 395.45 in Mumbai trading early Friday.

Brokerages like UBS find Bharti Airtel attractively valued. Edelweiss Securities has even upped its target price on the stock on hopes that Vodafone, being low on Ebitda generation, may get out of competition, if no major measures are taken by the government to solve the AGR issue.

In such a scenario, Bharti Airtel will be in a position to take up nearly 40 per cent of the ground ceded by Vodafone Idea in what would become a duopoly.

On Thursday, Bharti Airtel made Rs 28,450 crore provisions as the SC recently upheld the government's position on including revenue from non-telecommunication businesses in calculating the annual adjusted gross revenue (AGR) of telecom companies.

A share of that revenue has to be paid as licence and spectrum fee to the exchequer. This led the Sunil Mittal company to report Rs 23,045 crore loss for September quarter on Thursday.

If Bharti were to pay this large amount, it would lead to a negative rating action, but lack of government support could cause a bigger financial distress to Vodafone Idea, given its low Ebitda generation compared with the two peers, said Nitin Soni of Fitch Ratings.

“This is a competitive market where if you do not invest even for six months, it will lead to rapid deterioration in your subscriber base. So Voda-Idea’s decline will make the market share skewed towards Jio and Bharti Airtel would also gain a bit of the incremental market share from here on,” Soni said.

Emkay Global believes Bharti Airtel could capture 40 per cent of Vodafone’s subscriber loss, even though a large increase in leverage in the near term could impact borrowing costs.

Eventually, there could be three outcomes.

First, the government does not intervene. Second, the government intervenes, but marginally. And third, the government comes out with meaningful measures.

If the government does not provide any relief to the telecom operators, it would make the telecom industry near-duopoly, wherein Bharti stands to benefit substantially given its strong positioning in the 4G market and sole presence in the 2G market,” said Edelweiss Securities.

If the government goes with the two-years’ moratorium for spectrum payouts and reduction in licence fees to 5 per cent from 8 per cent currently, as reported in media, the development could provide only short-term relief to these telcos, analysts said.

“It will still severely strain Vodafone Idea’s balance sheet, leading to sustained market share loss. The government can take some meaningful measures to reduce pending dues by waving off interest, penalties and interest on penalties, to ensure that the current industry structure is maintained. In such a scenario, if the current three-player market sustains, but the pricing recovery could be slower,” Edelweiss said.
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