Vodafone Idea cannot pay AGR dues – India Ratings

India Ratings, a unit of Fitch Group, downgraded the credit rating of Vodafone Idea and said it doesn’t see how the company can pay the money sought by the Department of Telecom as directed by the Supreme Court.

A bench headed by Justice Arun Mishra has asked companies such as Vodafone Idea and Bharti Airtel to pay an estimated Rs 90,000 cr to the Department of Telecom on Feb 14. The next date of hearing is March 17.

If Vodafone Idea doesn’t pay by March 17, there is no clarity about what the bench plans to do with the company.

India Ratings said it simply didn’t see where Vodafone Idea is going to get enough money to comply with the decision of the court.

Vodafone Idea had cash of around Rs 11,500 cr as of end of December, and that too because of the Rs 17,900 cr put in by the two promoters — Vodafone pls of Great Britain and Aditya Birla Group seven months earlier.

Since the company is a loss making venture, and spends around Rs 1,100 cr per month on expanding its network, the cash reserve is now likely to have dwindled closer to Rs 10,000 cr, which is required to keep the operations running.

This leaves it with only two options to raise the Rs 50,000 cr required to pay the DoT — ask its promoters for more money, or ask banks for more debt.

However, asking banks is unlikely to yield any result as banks have already lent around Rs 50,000 cr to the firm, and if they lend more, there is no certainty that they would get it back.

The second option — of asking shareholders to put in cash — is also unlikely to yield much benefit.

The biggest shareholders are Vodafone plc, which has a stake of around 45%, and ABG, with a 26% stake.

However, shareholders have already seen the value of their investment fall by nearly 85% in one year, from over Rs 18 per share to around Rs 3 per share now.

When Vodafone and ABG invested Rs 17,900 cr in April, the shares were worth around Rs 16. Now the value of that investment is only Rs 3,350 cr.

Given the poor outlook, said India Ratings, there’s no certainty that anybody would want to put more money in the company’s shares, even Aditya Birla Group.

“Ind-Ra had been factoring in the likely support from ABG to VIL, but had factored in the weakening of support from Vodafone Plc. However, continuation of support from ABG remains contingent on the financial viability of the business, which appears to be challenging, based on the prevailing scenario,” the rating agency said.

As for Vodafone plc, the company has two big holdings in India — a 42% stake in Indus Towers and a 45% stake in Vodafone India.

However, the British company has also taken a Rs 11,000 cr loan from various banks for the benefit of Vodafone Idea.

Even if the British company sells its investment in Indus Towers for an estimated valuation of Rs 19,200 cr, said India Ratings, it will first use 11,000 cr of this to pay back the banks.

“Assuming Vodafone Plc monetises its 42% stake in Indus Tower for INR 192 billion (Rs 19,200 cr) cash and utilises the proceeds for the repayment of loan worth INR 110 billion (Rs 11,000 cr), the total funding flexibility with Vodafone Plc to support VIL would be about INR 82 billion (Rs 8,200 cr),” the agency pointed out.

The agency also pointed out that Vodafone Idea has taken various loans, and some of the loans contain provisions which require the company to pay back the money quickly in case there is a risk of the company running into financial troubles. This would suck out whatever liquidity the company is left with.

Ind-Ra believes VIL does not have the ability to pay the dues by 17 March 2020, given the lack of clarity on promoter equity infusion, severe erosion in refinancing flexibility and insufficient cash balance. The ruling has also elevated the risk of acceleration in the payment of financial liabilities. Also, even if VIL pays the principal amount for AGR dues to comply partially with the SC order, the current cash and equivalent and future cash flows will prove insufficient to meet the financial obligations, in Ind-Ra’s view,” it said.

India Ratings said it had downgraded Vodafone Idea’s debt from B to BBB- because of the ruling by the SC bench beaded by Justice Arun Mishra that asked the company to pay the entire amount immediately.

Because of this ruling, said India Ratings, it has become impossible for Vodafone Idea to pay back the dues in installments, and the company is now in an unpredictable situation.

“In its earlier credit review dated 24 January 2020, Ind-Ra had factored in the SC’s decision to hear the modification application filed by telcos, and the DoT’s decision to not take any coercive action on telcos, if they failed to comply with the SC’s order dated 24 October 2019. Ind-Ra had also given due weightage to the likelihood that the modification application would be accepted by the SC and telcos could agree bilaterally with the DoT to devise a payment schedule for the AGR liabilities (for instance, a two-year moratorium along with 10 years of instalments) that would enable the business to remain viable and a going-concern.

“In addition, Ind-Ra had highlighted on 24 January 2020 that any unfavourable ruling by the SC with respect to the modification application could affect VIL’s rating. However, the SC’s ruling on 14 February 2020 has mandated the immediate payment of the AGR dues, and has significantly reduced the possibility of any relief measure that the DoT can possibly extend to telcos. Under the revised circumstances, it is highly likely that VIL would miss the 17 March 2020 deadline to clear the AGR dues,” it said.

It also put the company’s debt on a negative earnings watch, indicating that the rating may be cut further.

“The rating watch negative reflects significant uncertainties over the outcome of the modification application filed by telcos; the quantum of the AGR-related liabilities; and VIL’s ability to pay the AGR dues. The RWN also reflects uncertainties over other liquidity events, such as the possible risk of accelerated payment of financial liabilities and likely delays in asset monetisation.”