Fitch Rating says tariff hikes, recent govt relief won’t offset impact of AGR dues

The rating agency has a negative outlook on the telecom sector under a mammoth debt in question.

The Cabinet this week provided some relief to telcos by clearing a two year spectrum moratorium, which will ease cash flow pressure on all three telcos.
Fitch Ratings says recent relief from the government and tariff hikes will not help telcos offset the impact of dues they have to pay in next three months . The rating agency has a negative outlook on the telecom sector , under a mammoth debt with viability of operators in question .

“...these are unlikely to be sufficient to offset the impact of a recent Supreme Court judgement for incumbents Bharti Airtel (BBB-/Rating Watch Negative) and Vodafone Idea Ltd,” stated the rating agency in its report on Friday .

The top court of the country passed a verdict on October 24, as per which the license holders have to pay Rs 1.3 lakh crore dues on basis of adjusted gross revenue (AGR) within next three months. Airtel and Vodafone Idea are worst hit as they have to pay upwards of Rs 80,000 crore .


“Fitch has a negative outlook on the sector for 2020 primarily due to heightened financial risk associated with the large unpaid AGR-related dues,” it stated .

The Cabinet this week provided some relief to telcos by clearing a two year spectrum moratorium, which will ease cash flow pressure on all three telcos.

Fitch says Vodafone Idea and Bharti will benefit the most as their negative free cash flow will reduce by $1.7 billion and $850 million a year, respectively, for the financial year ending March 2021 (FY21) and FY22.
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In the interim period , the operators decided to increase tariffs , first time since 2016, but Fitch doesn’t think it will be enough.

The rating firm will take negative rating action on Bharti if it pays the AGR dues within three months and funds the payments entirely by debt.

“This is because Bharti's FFO adjusted net leverage will then deteriorate to around 3.0x-3.3x in FY20 - significantly higher than the threshold of 2.5x, above which we would take negative rating action,” the report stated .

The agency said it will resolve the Rating Watch Negative on Bharti Airtel , once there is greater clarity on the timing and financial impact of the regulatory dues and any remedial measures.
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Fitch , expects Vodafone Idea to continue to struggle to improve its earnings before interest tax depreciation and amortisation (EBITDA ) amid fierce competition, limited financial flexibility to invest and a shrinking subscriber base.

“Vodafone Idea disclosed that it had to reclassify some long-term debt to current debt as it failed to meet certain financial covenants in bank loan documents, and it is in discussion with the lenders to request waivers,” stated the rating agency .
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Vodafone Idea , still in the last left of its integration has to pay Rs 44,000 crore to government as dues and also posted the biggest loss in corporate India in its July-September quarter .

However , the agency said that Reliance Jio (Jio), a subsidiary of Reliance Industries Ltd (RIL, BBB-/Stable) is not affected by the ruling (SC) and is likely to continue to gain revenue market share, which will support RIL's deleveraging plans.

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