Sector Update - Telecom - AGR verdict - ICICI Securities

The Supreme Court verdict on AGR allowing 10 years staggered payment and clarifying on spectrum trading/sharing liabilities, possibly marks the end of a long drawn legal tangle. For the sector, as a whole, the issues now shift to tariff hike, which will be the key determinant to the path of improvement in cash flow generation, return ratio and survival in case of Vodafone Idea (VIL). For Bharti Airtel (assuming it also has to pay Videocon's dues), annuity payment of Rs. 4638 crore from FY22 end onwards, will not be a major issue. However, VIL which has already been plagued by cash burns will find it difficult to meet the demand of annuity payment of Rs. 8391 crore from FY22 end onwards. Apart from tariff hike (to the tune of ~92%), it would also need immediate capital infusion to bridge the cash gap. The judgement requires 10% of "total dues" to be paid before March 31, 2021 and remaining in 10 equal instalments. We assume that since both VIL and Bharti have already paid more than 10% of dues, payout should begin from FY22 end.

Valuation & Outlook

On the positive side, the legal tangles seem be over. We expect the industry, as a whole, to utilise their management bandwidth to expand profitability and cash generation. Airtel, with comfortable leverage, superior customer quality and consistent KPI is our top pick. We maintain BUY on Airtel with an unchanged target price of Rs. 700/share. We also maintain SELL on VIL with an unchanged target price of Rs. 6/share, given the difficult path ahead to assure survival and lack of clarity on the same. We also downgrade Bharti Infratel to REDUCE (from HOLD earlier) with a target price of Rs. 180/share. The key risk for Infratel is on tenancy growth concerns and possibly in worst case, Vodafone Idea's survival (as it is an anchor tenant).

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_Telecom_SectorUpdate_Sep20.pdf

Source : Equity Bulls

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