• No relief in Adjusted Gross Revenue (AGR) dues by the Supreme Court of India, contrary to market expectations
• In worst-case scenario, Vodafone-Idea may exit market; but this might eventually benefit Bharti on second order thinking; await more news flow.
• Maintain BUY on SingTel (SGX:Z74) with price target of $3.80.

What’s New

• Yesterday, the Supreme Court of India rejected the pleas of Bharti, Vodafone-Idea and Tata Teleservices to review its October 24 verdict that widened the definition of Adjusted Gross Revenue (AGR) that led to a whopping Rs.1.02 lakh-crore (~S$20bn) in additional licence fees, spectrum usage charge, penalties and interest. Vodafone and Bharti face statutory dues of Rs 53,039 crores (~US$7.5bn) and Rs 35,586 crores (~US$5bn) respectively to be paid in a week.

Our View

• Funding cost might hit Bharti in the short term, but it may benefit from Vodafone’s potential exit. The market had expected the dues to be paid over a longer time frame of a few years along with a reduction in penalties and interest.
• Vodafone-Idea is not in a position to pay the amount upfront. Vodafone’s projected FY20F earnings before interest, tax, depreciation and amortisation (EBITDA) of Rs14,950 crore (~US$2bn), market cap of US$2.5bn and net debt to FY20F EBITDA ratio of over 7x are too weak to support ~US$7.5bn in AGR dues. Vodafone has stated that it could be forced to shut down its business unless there is a big relief in AGR dues. Vodafone’s 27% revenue share from its 300m customers might go to Jio and Bharti respectively under a no-relief scenario.
• Bharti is evaluating curative petitions. In addition, following the Supreme Court’s ruling on AGR the Department of Telecom (DoT) has slapped even bigger AGR dues totalling ~US$40bn on various non-telecom companies (including government linked corporations) with internet and infrastructure licences. In our view, this might open a Pandora’s box in the definition of AGR and we expect new developments on this front. Bharti comprises ~27% of our sum-of-the-parts (SOP) valuation for SingTel. We maintain our BUY call on SingTel.

Source: DBS Research - 17 Jan 2020