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We've covered the key happening in telecom in significant detail in our long-form post here. A lot has happened since then including the AGR ruling (Airtel and Voda-Idea have to pay a 21K cr and a 28K cr penalty respectively) which has hit both debt-laden industry incumbents significantly. It has also brought them to the government's doorstep seeking help. In today's post we try to look into the nature of their requests, and try to balance the pros and cons of government intervention.
What do the Telecom companies need help with? Cheaper credit & lower levies.- The most pressing issue for both the large Telcos in India is the amount of debt they have built up. The interest needed to service this debt eats up a significant portion of earnings, leaving little room for upgradation and maintenance. With shocks like the AGR ruling, these firms will not have to pay out large sums of cash - cash which they don't have. While Airtel is considering raising the fund through a variety of equity focussed alternatives, that isn't a luxury Vodafone Idea has, which has seen its stock beaten down nearly 95% from its highs in November, which means any issuance via equity now will significantly dilute existing equity. [Their current market cap is around half of their AGR penalty]. A cheaper line of credit from the government will help them refinance some of their existing debt, reducing the interest burden they face. The second demand is the reduction of levies from the current 3% to 1%, which would provide them some breathing room to survive, and probably grow.
We break the next part around government intervention into two parts - can the government do it (the ability question) and should the government do it (the willingness question).
Ability:
It is important to note the backdrop in which the request for support appears. The government is already stretched thin on the back of the corporate tax cuts and lower than expected tax cuts, and will have to dial back expenses this year to maintain fiscal discipline. With some divestments being pushed back into the next fiscal for a variety of reasons, any help to the industry now will be a strain on our fiscal deficit and is historically something that the government has been hesitant to compromise on. That being said the industry currently pays an effective rate of almost 30%, leaving some wriggle room on the table for the government to budge. On the ability front, therefore, we rate this on an extremely limited but possible.
This brings us to the second piece, even if the government does has the bandwidth, can it, and should it intervene?
Willingness:
While traditional free-market folks would advice against it, reasoned pragmatism would suggest in favour of some minor help today. The telecom industry has seen a tremendous shrinking of competition post the entry of Jio, reaching a 3+1 (Jio, Voda-Idea, Airtel, BSNL) going 2+1 market. In an industry where the barriers to entry are so high, letting one player go unchecked letting competition die in its wake can have terrible consequences for the customer in the long run, especially for a service as fundamental as telecom. With the big picture in mind therefore, a concession that helps both bruised incumbents stay on its feet, would be a small price to pay.
Which presents a strange dilemma for the government where it sees the need to intervene but is bound by fiscal constraints. If it does decide to intervene it is likely that it chooses a mode that defers the impact on its finances, making a line of credit the most likely choice.
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