With Airtel, Vodafone Opting For AGR Moratorium, Can Govt Expect A Windfall In 5G Spectrum Auction?

After Vodafone Idea, Sunil Bharti Mittal-owned, Airtel has also opted for the four-year moratorium for payment of adjusted gross revenue (AGR) dues. This means that both the beleaguered telecom companies will now be able to free a subsequent amount of cash flow on their balance sheets, introducing a fresh spate of investments in the industry. According to industry experts, the government's decision to provide a moratorium on AGR was taken keeping in mind the need to organise 5G auctions at the earliest. 

Both Airtel and Vodafone Idea had shown reluctance towards the idea of participating in 5G spectrum auctions, which the government has been pushing for close to two years. 

In an investors’ call held last year, Bharti Airtel CEO Gopal Vittal had said that the company would stay away from the 5G auctions, as the company was not willing to invest in the new spectrum at the current price levels. 

“The 5G ecosystem is yet to develop here and the prices are very high and we can’t afford them,” Vittal said during the company’s post-earnings call.

Vodafone Idea, on its part, was on the verge of bankruptcy and had even offered to provide equity to the government in lieu of a moratorium on AGR dues.

Bharti Airtel's net debt at the end of the June 2021 quarter stood at Rs 1.59 lakh crore, while Vodafone Idea, which reported a loss of Rs 7,319.10 crore in the same quarter had debt of Rs 1. 9 lakh crore. Vodafone Idea, which had Rs 920 crore in cash and cash equivalents at the end of June quarter of the current fiscal has AGR dues worth Rs 58,254 crore of which it has paid ₹7,854 crore. The company will be saving the amount of Rs 9,000 crore after opting for a moratorium, which otherwise would have been due at the end of March 2022.

Out of the three players- Reliance Jio, Vodafone Idea and Airtel, only Jio was cash-rich, before the government’s relief package on AGR dues, owing to its parent company RIL’s positive cash flow.

Jio has also managed to attract equity infusion from global investors in 2020, making it a cash-rich organisation waiting for the 5G auctions.

Will There Be Fireworks At 5G Auctions?

The government has been worried about the delay in holding the auctions for 5G spectrum because of the telecom companies' reluctance to participate in another price war that has been the hallmark of spectrum auctions in India since 2010. Earlier this year, telecom minister Ashwini Vaishnaw had said that the 5G spectrum auctions were likely to be held in February 2022. The centre’s fiscal deficit in 2020-21 was 9.3% of GDP, as revenue from GST and other sources dried up, the government has set a target of 6.8%.

While the successful sale of Air India to the Tata group has generated cash worth Rs 2,700 crore for the government, it’s still looking for other avenues to meet the shortfall of revenue from other sources. The government is also looking for space to bring down excise duty on petroleum products, which has attracted criticism from the opposition due to high petrol and diesel prices in the country. If the government manages to hold a successful 5G auction before the end of this fiscal year, it would be able to compensate for the loss of revenue in the current fiscal on account of a moratorium on AGR dues provided to telecom companies.

Telecom sector expert Mahesh Uppal cautions against any expectations of aggressive capital expenditure plans by telecom companies. He says, "Personally I don't think Vodafone Idea is out of trouble even after taking the moratorium on AGR dues. Unless there is fresh equity infusion in the company, there would be serious concerns regarding the company's long-term health". He further adds, " the govt may go for 5G auctions now, but the govt knows that spectrum will probably sell at reserve price as there is little remaining competition for spectrum  with only three players left in the industry.”

Ratings agency ICRA had earlier said that “ Debt continues to remain the Achilles heel of the industry. With debt levels unyielding at around Rs 5 lakh crore expected for March 31, 2022, the debt coverage indicators continue to remain weak for the industry, despite the expected improvement in cash flow generation."

TRAI has recommended the auction of about 8,644 MHz of telecom frequencies, including those for 5G services, at an estimated base price of Rs 4.9 lakh crore. 

Isha Chaudhary, Director, CRISIL Research,  is positive about the industry prospects after the government’s relief package to telecom companies. “Moratorium on AGR and spectrum dues is likely to free industry cash flows up to Rs 35,000 crore annually, when the earlier moratorium on deferred payments ends.”  However, she also maintains that “ the reserve prices of 5G are expensive and there has not been any revisions to the same. Thus events around this will remain a key monitorable.”