Will Vodafone-Idea survive the AGR tempest?

Telecom major Vi faces its greatest battle yet as it negotiates AGR dues with the Centre, a decision that could seal its fate in India’s telecom industry.

Beleaguered telecom operator Vodafone Idea Limited, or Vi, is currently in talks with the Ministry of Communications over the much-contentious Adjusted Gross Revenues (AGR) issue. While most details on the direction of these talks remain under wraps, the resulting resolution, whichever way it swings, will be decisive for the telecom operator’s survival in India.

The issue at hand is massive. On one hand, having a third private telecom operator in India—one of the world’s largest and fastest-growing consumer markets—is key. Without it, the market is left open to what is essentially a duopoly between Bharti Airtel and Reliance Jio—a factor that could be detrimental to the consumer interest of pricing pressures on the service providers in question.

The AGR dues are a thorn to Vi’s ability to raise capital, increase profitability through more significant ARPU, and turn its business around.

On the other hand, a decisive call on AGR levies will be essential for Vodafone-Idea. The latter is the worst-performing lot of the three private operators, with a net debt of nearly USD 24 billion to the central government. This includes AGR dues of USD 8.4 billion—with the rest being deferred spectrum payments to be made by the cash-strapped telco.

Why the AGR Dues are Fatal?

The massive scale of dues has affected Vi significantly. According to data from the Telecom Regulatory Authority of India (TRAI)’s monthly subscriber tracker, in September 2018, the merger of Vodafone and Idea Cellular created India’s largest telecom operator in terms of user base by market share—at 36.6%, against Airtel’s 29.2% and Jio’s 22.5% market shares at the time, six years ago.

Vi, thus, had 428 million users in its network six years ago.

According to the latest TRAI data from July this year, the telecom operator holds an 18.5% market share across India and currently serves 216 million users. This also means that, in six years, Vi has lost nearly half of its user base.

The telco also needs to catch up in terms of services. While Bharti Airtel and Reliance Jio have rolled out consumer-end 5G services since October 2022, Vi remains the only private telco in India without 5G services. With the state-run telecom operator Bharat Sanchar Nigam Limited (BSNL) set to introduce 4G services at competitive tariff rates, industry experts feel that Vi risks further losing a sizable chunk of its user base and, thus, seeing declines in both revenue and profitability.

Amid such a decline, the AGR dues are a thorn to Vi’s ability to raise capital, increase profitability through more significant average revenue per user (ARPU), and turn its business around. As against the Centre’s calculation of USD 8.4 billion in AGR dues, Vi’s calculation pegs its dues at USD 2.6 billion.

Vi’s claim, which it filed as a curative petition to the Supreme Court, is based on its internal calculations of what its revenue dues should have been—which it claims the Department of Telecommunications wrongfully computed.

AGR is a share of revenue telecom operators pay the Centre in exchange for using spectrum and acquiring licenses to operate communications services in India. The AGR regime was introduced in 1999 after telecom operators lobbied for a recurring payment model instead of a fixed, lump sum payment to the Centre.

Vi’s asset class is still lucrative for lenders, even with its scale of debt, due to its large user base and influence in a difficult-to-navigate market.

Comparatively put, Vi is thus looking at a 70% reduction in its AGR dues to the Centre. Unfortunately, on 19 September, the telco’s curative petition at the Supreme Court was dismissed without a hearing by a three-judge bench headed by Chief Justice DY Chandrachud, dealing a massive blow to the telecom operator’s hopes of survival.

In response, Vi shares declined nearly 20% on the Bombay Stock Exchange on the same day.

What Happens Now?

On 23 September, four days after the SC’s dismissal, Vi Chairman Ravinder Takkar said at an investor conference, “We have been engaging with senior government officials with a clear view from every side on the merits of the case, regarding calculation errors and mistakes, and penalties and interest on the mistakes. The Centre has asked us to comprehensively view what we believe is the right mechanism and request to address the challenge because there is a clear understanding in the government that it should not be fair to ask us to pay for a calculation error.”

On the same day, Union Telecom Minister Jyotiraditya Scindia added that the Centre is engaging with Vi to reach a mutual agreement over its future. The Government of India is the largest stakeholder in the operator, holding a third of the company.

The moment is a crucial juncture for Vi, which continues to maintain to its shareholders that a turnaround is, in fact, just around the corner. At the above-cited investor call, senior officials at the telco added that talks of funding, including waivers of bank guarantees amounting to USD 3.2 billion, are proceeding with multiple parties and could reach a state of public clarity in about two months from the end of September.

A day before this call, Vodafone-Idea announced deals worth USD 3.6 billion for network expansion, improvement and introduction of 5G services—a factor that the telco largely hopes will improve its prospect of charging higher revenue from its users.

Funding for such a deal, signed with Ericsson, Nokia, and Samsung, remains hinged upon multiple factors for Vi, including its ability to raise funding at the lowest possible rates.

What Do the Experts Say?

Speaking about the situation at hand, a senior telecom analyst at a top Mumbai-based brokerage said on conditions of anonymity, “Vi’s asset class is still lucrative for many lenders, even with its scale of debt, due to its size of user base and influence in what is a difficult market to navigate. While the AGR factor is the most crucial for telco, it is important to note that a resolution is not entirely out of the question. Talks with numerous financiers, including public sector banks, are understood to be progressing at a steady pace.”

The move may also have indirect impacts on infrastructure providers. For instance, a note to investors by brokerage firm BNP Paribas on network infrastructure provider Indus Towers highlighted the crucial role that Vi is expected to play for the company—with its potential for a revenue upside fuelled almost entirely on hopes of a Vi revival.

In the investor note, Kunal Vora, head of India equity research at BNP Paribas, said, “Through its (infrastructure) investment, Vi aims to expand its 4G population coverage from 1.03 billion to 1.2 billion. Vi will also deploy its 5G network in its top markets and plans to add new base stations to its existing network sites—which should result in loading revenue for tower companies.”

He further highlighted that the telco may also add fresh sites, which should provide fresh tenancies for tower companies. The expected addition of 50,000 collocations for Indus Towers over FY 25-26 is primarily led by Airtel’s expansion with 34,000 additions, with the balance mainly coming from Vi’s expansion. “The telco’s plan presents a slight upside to Indus Towers’ estimates, subject to the share the company garners,” he stated.

Such an impact leaves Vodafone-Idea at a crucial juncture. Much will depend on its talks with the Centre, for which Vi’s dues also generate a sizable amount of potential inbound revenue.

By Vernika Awal

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