Share prices of leading telecom operators Bharti Airtel and Vodafone Idea rallied on Tuesday?s early trade and continued its rally on Wednesday trade as both the firms had announced a tariffs hike starting next month. However, there was not any guidance on the
amount of the hike or the subscriber segments to be impacted by the move.
While Bharti Airtel’s share hits a fresh 52-week high of Rs 452.95 on Wednesday, Vodafone Idea zoomed more than 20 per cent for the second consecutive day to Rs 7.35 (at the time of writing) on the NSE.
The tariff hike announced by the two telecom operators, following major financial crisis, is the first in several years as the whole industry was going through a battered competition, especially after the entering of Reliance JIO in September 2016.
Both the companies had reported a whopping combined loss of nearly Rs. 74,000 crores in the quarter ending September 30, as the leading telecom players were hit by statutory dues arising from a recent Supreme Court ruling. While Vodafone Idea posted a loss of Rs 50,921 crores, which is the highest-ever quarterly loss by any corporate in India, Airtel reported loss to the tune of Rs. 23,045 crores.
Bharti Airtel?s operating profit was up 41 per cent at Rs 8,928 crore in Q2FY20, driven by lower network operating expenses, selling & marketing as well as other expenses. Consolidated operating profit margins, too, improved to 42.3 per cent in Q2 from 31.5 per
cent in the year-ago quarter, even though it posted a pre-tax loss of Rs 31,334 crore due to a provision of Rs 28,450 crore for outstanding payments to the central government on account of the Supreme Court judgment on adjusted gross revenues (AGR).
The Supreme Court late last month ruled in favour of the government, upheld a DoT demand that telcos clear their adjusted gross revenue (AGR) dues, a share of which has to be paid as licence and spectrum fee to exchequer. Following the order, both Bharti Airtel and Vodafone Idea last posted massive net losses while provisioning the payments of these dues.
Cumulative demands for the sector include licence fees of about Rs 92,000 crore and SUC of roughly Rs 42,000 crore, as per government estimates. Airtel faces a demand of over Rs 41,000 crore in licence fees and SUC. The court judgment will have a major impact on the viability of the sector, which is already overwhelmed by debt of over Rs 7 lakh crore.
Recently Vodafone?s global CEO Nick Read had said that its joint venture in India may soon have to be liquidated, citing ?unsupportive regulation? and ?excessive taxes? as reasons. Now Vodafone Idea?s ability to continue business will depend on reliefs sought from the government and positive outcome of the legal option it has.
The acute financial stress in the telecom sector has been acknowledged by all stakeholders and a high level Committee of Secretaries (CoS) headed by the cabinet secretary is looking into providing appropriate relief. The hope was bolstered after reports emerged that the government is keeping a close eye on the sector and may announce some sort of relief for the beleaguered sector.
The telecom industry with only three major players is like an oligopolistic industry which is not likely to suffer massive price erosion and the situation may improve in future, but the kind of pain these firms are facing, whether they would rise proportionately to meet the burden is doubtful as the industry has a debt burden of over Rs 1 lakh crore.
Meanwhile, TRAI?s final decision on IUC is still awaited wherein it has to decide on moving to zero or extension of the 6 paise per minute regime. At this juncture, it is anybody’s guess how TRAI?s recommendations on floor pricing will look like. How the TRAI will balance the need for sector repair and universal access is also a question to reckon with. The current spike in stock prices is good opportunity for those who are holding the stocks, to book some partial profits. For investors who want to enter the stock, they should wait for any further clarification about the tariffs hike rate and its impact on company?s operating profit, and any further direction from the government on the sector.