Shares of Bharti Airtel gained 3 percent and Vodafone Idea jumped 9 percent intraday on October 30 after the government formed a panel to check financial stress in these telecoms and suggest measures.
Some of the measures being explored could be deferment of the spectrum auction payment for the next two years (FY21 and FY22), reduction in license and spectrum usage fees etc.
Additionally, Telecom Regulatory Authority of India (TRAI) is expected to examine minimum pricing for voice and data services, said Credit Suisse which has a neutral call on Bharti Airtel with a target at Rs 370 and underperform rating on Vodafone Idea with a target at Rs 4.5 per share.
Bharti Airtel was quoting at Rs 371, up Rs 11.05, or 3.07 percent. Vodafone Idea was up 2.34 percent at Rs 3.94 on the BSE at 1214 hours IST.
The overnment on October 29 formed a committee of secretaries (CoS), headed by the cabinet secretary, to look into financial stress in the sector and suggest measures to address current cashflow strain and to ensure long-term viability of the sector.
"The formation of CoS is incrementally positive for the sector as it is the first step in government looking to resolve the problem. However, it remains to be seen what meaningful measures the government takes to help the sector," Credit Suisse said.
The global brokerage further said among measures the important one for Vodafone Idea is the deferment of the spectrum auction payment as it can significantly aid the near-term cashflow needs of the company.
Vodafone Idea needs to pay Rs 12,000 crore annually for spectrum auction payment and for two years it would be Rs 24,000 while Bharti Airtel needs to pay Rs 6,500 crore per year for spectrum auction payment, hence it would be 13,000 crore for two years.
Analysts feel the deferring of payment only improves the cash flows in the near term for both but this does not reduce the overall debt.
"The deferment will help Vodafone Idea to sustain with existing cashflow for the next 18-24 months and the other key measure can be setting minimum pricing for voice and data services, it said.
According to the brokerage, it can have a significant impact on long-term viability of sector if minimum pricing is materially above current pricing which is clearly unsustainable.
"We do not think tinkering with license and spectrum usage fees will help substantially, especially post the updated definition of AGR, unless the government reduces these fees meaningfully. We note that AGR dues arising from recent Supreme Court (SC) verdict is a separate matter and it remains to be seen if CoS will address the same," Credit Suisse said.
Last week, the Supreme Court had upheld the definition of Adjusted Gross Revenue (AGR) calculation as stipulated by the Department of Telecommunications.
Terming the issues raised by telcos with respect to AGR as "frivolous", the SC had further held that not only the original charges but principal interest and penalties on delayed payments would also be payable.
The Apex Court had said that all revenues accruing to telecom operators would constitute AGR. It added that revenues gained from termination fees and roaming charges would also be included in AGR.
The SC decision not only had a negative impact on the telecom companies but also banks which have exposure to these companies. Both telecom stocks fell sharply on that day.
"The current situation in the India telecoms sector continues to be fluid with a lot hinging on government's relief measures as a large part of telcos debt is owed to the government. The recent events (including review of IUC charges) show that the government is concerned about the financial health of incumbent operators. It remains to be seen how much of these concerns will lead to concrete measures providing relief to the sector," Credit Suisse said.
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