Fitch: Supreme Court ruling negative for incumbent telcos

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SME Times News Bureau | 21 Jan, 2020
Vodafone Idea Limited and Bharti Airtel Limited will be affected by the Supreme Court's rejection on January 17 of a review petition against its earlier ruling in a long-running telecom sector tax case, Fitch Ratings said on Tuesday.

The court's ruling in this case could also have significant repercussions for India's banking sector, as well as the country's broader economic outlook, the rating agency said.

The Supreme Court's rejection on January 17 of a review petition against its earlier ruling is credit negative for the industry, said Fitch Ratings.

The Supreme Court's decision to reject the review petition is likely to lead the Department of Telecommunications (DOT) to demand that telcos pay unpaid dues on licence fees and spectrum usage charges by January 23, 2020, it said.

Fitch placed Bharti's ratings on Rating Watch Negative (RWN) outlook on October 30, 2019, following the Supreme Court's verdict against the country's telcos on the definition of adjusted gross revenue (AGR), based on which the incumbent operators must pay hefty dues to the government.

"We will resolve the Rating Watch Negative on Bharti's rating, based on our assessment of the positive impact of EBITDA growth from announced tariff hikes by all telcos in December 2019 and taking into consideration likely subscriber addition should Vodafone Idea gradually exit the industry," it observed.

We forecast Bharti's FYE20 FFO-adjusted net leverage to be 2.3x-2.6x, close to the 2.5x level above which we would take negative rating action. Nonetheless, the company's management is committed to maintaining an investment-grade rating and raised about $7.6 billion in equity in the last 12 months. It also raised $750 million of subordinated debt via perpetual bonds, on which Fitch assigns a 50 per cent equity credit," it said.

Vodafone Idea could face severe liquidity stress as a result of the tax case, as its cash balance of $2.2 billion as of September 2019 would be insufficient to pay its $6.3 billion of unpaid dues. The firm's efforts to generate cash have recently been hampered by loss of subscribers and revenue to Reliance Jio, part of Reliance Industries Ltd (RIL, BBB-/Stable), Fitch noted.

Vodafone Idea and Bharti have jointly filed a moderation application with the Supreme Court seeking more time to pay the funds due. They may also approach the government to obtain relief.

Vodafone Idea could also raise cash through sales of assets, such as its 11 per cent stake in Indus-Infratel or its 158,000 km of fibre networks. However, the company's chairman has said that Vodafone Idea will close in the event it is unable to obtain relief from the Supreme Court or the government, the agency said.