Telecom sector too big to fail?

In the last few days, telecom sector has dominated media headlines. After incurring cumulative losses of over 100,000 cr in Q2 for Vodafone Idea and Bharti Airtel, these companies are looking down the barrel. Rcom and Aircel have already declared bankruptcy. Losses were driven by 90,000 cr due for Annual Gross revenue (AGR) charges (in addition to penalty & other charges) to be paid to government as stipulated by a recent SC order. Telecom companies (Reliance Jio pay mere 3 cr) needs to be pay this within 3 months and have taken the provision in their recent quarterly earnings. FM has assured that they do not want any company in telecom sector to face bankruptcy and will look into demands of the companies including waiving off or spreading out the AGR amount over longer tenures.

The big Hole...

The cascading effect of these telecom troubles can be quite far-reaching as these companies owe more than Rs 250,000 crore to banks and to the government. If these companies get into trouble, it could trigger another round of NPAs for the banks along with GOI revenues getting hit (It is pertinent to not that banks have not yet started making provisions for telecom dues). Mutual funds have an exposure of 3000 crore in the bonds of Vodafone besides their equity exposure to Bharti Airtel, and Vodafone Idea. That could lead to loss of trust among retail investors and could also impact SIP inflows into MFs.

Time to be practical?

It is to be stressed at this point that Telecom companies are not disputing the AGR charges but have sought more time to pay them. They have also sought waiver off penalty and the interest cost as well. Government on the other hand is caught in catch 22 situation - If any of the players go bankrupt, it would mean loss of revenues straight away. Priority should be to revive the telecom sector and pushing them to default will not make any sense. On the other hand, if they do allow waiving off charges and easy repayment terms, it will set a bad precedent for the coming years as companies are more likely to take this route often. The next spectrum 5G auction may also lead to lukewarm response which otherwise can help government getting spectrum fees desperately required to maintain fiscal position.

In the meant time, telecom companies have decided to increase tariffs in this week and even though quantum is not yet declared, it is to be seen how customers will react to the new charges given they have been use to paying low charges for almost 3 years now!


The author may have positions in the stocks as mentioned in the article above, please assume us to be biased. This is not a recommendation to buy or sell securities. This is purely information about the company mentioned. Equity investing contain risks and please consult your financial adviser for any buy and sell securities!

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