Abstract
In October 2019, the Supreme Court of India in its judgement mandated that Vodafone Idea and Bharti Airtel, the two leading players in the Indian telecom industry, should collectively pay INR 886 billion as adjusted gross revenue (AGR) liability to Department of Telecommunications (DoT). This was collectively about 60% of the aforementioned liability of the Indian telecom industry. Vodafone Idea and Bharti Airtel had not provisioned for this liability and so were caught on the wrong foot. The payment of AGR will adversely impact the revenue and profitability of the incumbent players Vodafone Idea and Bharti Airtel. The entry of Reliance Jio with low prices for their high quality 4G data services had caused an unprecedented disruption in the telecom industry and had posed serious challenges for the incumbent players. In 2018, India had 1.2 billion subscribers and was the second largest telecommunications market in the world. The telecom industry had witnessed—(a) as many as 12 private sector players during the last two decades, (b) characterized by a growing wireless user base and internet subscriber base, (c) dwindling voice and data ARPU in the mobile telephony segment.
The case has been developed to understand the following—(a) telecom AGR dispute between the telecom companies and DoT, (b) analyse the competition in the telecom industry, (c) financials (profitability, liquidity, solvency and efficiency of operations) and the ability of Vodafone Idea and Bharti Airtel to pay the AGR dues to DoT and (d) evaluate the options for the government to bail out the telecom industry.
AGR Dispute
According to the National Telecom Policy (NTP) 1999, the private service telecom operators were allowed to migrate from ‘fixed license fee’ to ‘revenue sharing’ regime. Telecos were required to pay license fee to DoT as a percentage of adjusted gross revenue (AGR). NTP 1999 defined AGR given as revenue from ‘non-licensing activities’ such as interest, dividend, value added services, supplementary services, access or interconnection charges, roaming charges, revenue from permissible sharing of infrastructure, and any other miscellaneous revenue, without any set-off for related item of expense. Exclusions to be allowed were—‘(i) PSTN/PLMN related call charges (access charges) actually paid to other TSPs within India, (ii) roaming revenue actually passed onto other TSPs, (iii) service tax/sales tax actually paid to the government, if included in the gross revenue.’
Telecos had argued that gross revenue that arise from ‘ordinary activities’ of telecom operations should only be considered, and not to include ‘other income’ from non-core and non-license activities. Since long, the telecos have been representing before TDSAT and TRAI for reconsideration.
But, in 2019, the Supreme Court of India ruled in favour of the DoT that the definition of AGR will be as per the contract between the government and the telecom licensees, and not based on Indian Accounting Standard (AS 9). As a result, the telecos were liable to pay INR 1470 billion on account of revenue share short paid.
Indian Telecom Industry
The case analyses the telecom industry competition landscape using the strength, weaknesses, opportunities and threat (SWOT) framework. The Indian telecom sector was highly competitive. The top three industry players Vodafone Idea (372.86 million subscribers), Reliance Jio (356.08 million subscribers) and Bharti Airtel (329.88 million subscribers) accounts for 88.6% market share. BSNL was the fourth largest player with 127.19 million subscribers only. The rivalry is intense between the top three incumbent players. In 2015, the highly fragmented Indian telecom sector had 12 players. The teledensity (urban, rural and overall) had increased from December 2015 to September 2019. The gross revenue and the ARPU of the incumbent players had declined, due to price wars. Reliance Jio had disrupted the Indian telecom by introducing Voice over Long-term Evolution (VoLTE) technology. Indian telecom industry also witnessed merger and consolidation of the telecos.
Bharti Airtel: Financials
The wireless mobile business of Airtel accounted for 47% of the total revenue of Bharti Airtel in 2018–2019. It was a profitable segment in terms of EBITDA, as it stood at 22.68%. The ‘tower infrastructure’, ‘digital services’ and ‘landline and internet’ segments were profitable segments in the portfolio of Airtel’s business. Bharti Airtel had an operating margin of 5.87% during 2018–2019, return on capital (pre-tax) of 1.86% and return on equity of 0.58% during the 2018–2019. Bharti Airtel witnessed an increase in operating cycle up to 77.78 days in 2018–2019 from 56.91 days in 2017–2018. Bharti Airtel had cash and bank balance of INR 81.065 billion as of 31 March 2019.
Vodafone Idea: Financials
Vodafone had three business segments—‘mobility services’, ‘international long distance’ and ‘passive infrastructure’. These had a pre-tax operating margin of (–)9.96%, 27.5% and 11.29% respectively during 2017–2018. Post-merger of Vodafone with Idea, the new entity had achieved number one position in subscribers’ base, but the financial position had worsened in the short-run. The cost net of finance income stood at 23.54% of its revenue. Because of high net cash accruals at 41% of revenues, cash generated from operations were positive (14.2%). It’s working capital had also deteriorated, as operating cycle increased.
Options for Government of India
The option available before the government to bailout/revive telecom sector could be to allow—(a) telecos a two-year moratorium on spectrum payments, (b) telecos to make payment of remaining AGR dues of INR 1470 billion over a period of 20 years. The annual instalment payment may be computed at a bank prime lending rate, to avoid loss of revenue to the government in present value terms.
Footnotes
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The author received no financial support for the research, authorship and/or publication of this article.