Telecom operators Vodafone Idea and Bharti Airtel will be affected by the Supreme Court's decision to reject the review petition against its earlier ruling in a long-running telecom sector tax case, Fitch Ratings said.
The apex court’s decision on January 17 is credit negative for the telecom industry and will also have significant repercussions for India's banking sector, as well as the country's broader economic outlook, the rating agency added.
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 license fees and spectrum usage charges by January 23, 2020, it said.
Fitch had placed Bharti Airtel '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,” Fitch said.
The agency forecasts Bharti's FYE20 FFO-adjusted net leverage to be 2.3x-2.6x, close to the 2.5x level above which it 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 percent equity credit.
Further, Fitch said that the 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,” the agency said.
Moreover, Vodafone Idea could also raise cash through sales of assets, such as its 11 percent stake in Indus-Infratel or its 158,000 km of fibre networks, Fitch said.
The ruling could also have repercussions for the banking industry as the banking sector's exposure to telco firms stood at 1.3 percent of loans at FYE19, within which Fitch believes Bharti and Vodafone Idea account for a significant share.
Exposure to the telco sector is generally greater among private-sector banks than state-owned ones. While private banks generally have stronger capital and income buffers than their state-owned counterparts, additional problems within the banking sector as a whole would add to the recent strains associated with real estate and non-bank financial institutions and could set back recovery from the sector's weak financial performance, it added.
If this continues to impinge on credit growth, it could also limit improvement in India's macroeconomic outlook, Fitch said.
