The telecom relief package may have come a week late, but it did come as a welcome move for the telecom sector. While some of the macro level measures may actually help the larger telcos, it is not clear if Vodafone will really benefit.
Moratorium and rationalization
There are 2 important announcements in the Telecom Package. Firstly, it offers 4-year moratorium on outstanding AGR and SUC payments. In addition, it also announced that the calculation of SUC would be rationalized in future. This was long overdue as the current system did not leave too much IRR on the table for the Telcos. Lastly, AGR calculation will exclude non-telecom revenues in future, although this will not have retrospective effect. Sentimentally, they are positive.
Structural reforms too
The package went beyond immediate issues and also looked at some of the structural issues. For example, the FDI is currently restricted to 49% via the automatic route. That limit now stands enhanced to 100%, which should help get FDI in 5G ecosystem as well in the shift from 2G to 4G. Another important change was that the spectrum license period has been extended from 20 years to 30 years. In addition, the telecom players will be allowed to surrender the unused spectrum after 10 years, subject to payment of surrender charge. This will save pay-outs for idle spectrum.
Interest cost can be a bugbear
The moratorium may not be as simple as it sounds. The 4-year moratorium will come with an interest cost. The interest will be charged during the moratorium period at marginal cost of funds plus 2%. That is going to be a steep cost, if you consider that Vodafone has almost Rs.70,000 crore outstanding. The ideal way would have been to remove non-telecom income from AGR definition retrospectively rather than doing the same with prospective effect. It is hard to imagine either Bharti Airtel or VI being interested in paying such steep interest costs for the moratorium. Also, by not reducing the overall liability, the actual difference to the solvency of VI is going to be very short term in nature.
Will Vodafone benefit?
Prima facie, it is hard to see Vodafone gaining from this relief package, apart from some sentimental positive. The big challenge for Vodafone today is the AGR burden and regular loss of customers. Neither of these issues are going to be addressed. Moratorium with interest cost will only put further pressure on the finances of Vodafone. The only option was a drastic tariff hike, but the market may not really be prepared to accept such a big spike in cost. In the last 3 quarters, Vodafone has been losing bulk of its customers to Jio and Bharti. The crux of the dilemma is not being addressed; and that is the problem!