Government Has No Intention To Take Over Vodafone Idea, Says CEO
The government has no intention to take over debt-laden Vodafone Idea Ltd., and by giving more time to repay dues, it has allayed fears of a duopoly in the sector, according to the chief of the telecom operator that has been struggling to survive.
“I have engaged with the government for a very, very long time during this process, especially as this package [telecom moratorium] has come along,” Ravinder Takkar, managing director and chief executive officer at Vodafone Idea, said in an interview with BloombergQuint.
“The government has no interest in owning, controlling, and somehow running this company. They have made this absolutely clear,” he said. "Their interest is to make sure the industry remains competitive, there are three private players in the market and they all compete vigorously.”
Two weeks ago, the union cabinet approved a relief package that includes a freeze on the repayment of statutory dues on adjusted gross revenue and spectrum fees for four years. The companies opting for it, however, will have to pay interest at the marginal cost of funds rate plus 2% starting Oct. 1.
The government has included an option to convert Rs 9,400 crore interest on deferred payment into equity, according to ICICI Securities. At the end of four years, the government also has the option to convert the Rs 1,00,800 crore deferred instalments into equity.
The equity conversion, the brokerage said, would ensure that at the end of this period, Vodafone Idea does not have an elevated debt liability. But that will significantly dilute the existing shareholders’ stake, and the government may end up becoming the largest shareholder of the telecom operator.
Yet, according to ICICI Securities, that “increases the visibility” of Vodafone Idea remaining a going concern.
Takkar said after the package has been provided, the management is more committed to making sure that "we are providing more services to the customer and that also involves our shareholders".
The company awaits details of the relief package to determine the exact amount that would be deferred.
“Obviously, this is a significant change compared to where we were, which means we have to update our business plan,” he said. "Then we will have a better understanding of the funding requirement ... we will, of course, go to our board for approval of those business plans and funding needs.”
Vodafone Idea has received an approval for an equity fundraising of up to Rs 25,000 crore. But it’s yet to decide whether to opt for a qualified institutional placement route, which means no participation from existing promoters and their shareholding getting diluted subsequently. Or a rights issue that will require promoter participation as well as an underwriting from them to acquire any under-subscribed portion.
Investors, according to Takkar, have more clarity on the fund usage now compared to the previous mop-up through a rights issue.
“In some ways, that’s exactly what happened in 2019 when the fundraising was done by promoters with Rs 25,000 crore raised by the company, and then immediately most of that money ended up going to the government,” he said. “The investors are saying we need to make sure that there is deferment of these payments to the government, but money can go into the company.”
Will Promoters Step Up?
But will promoters Vodafone Plc. and Aditya Birla Group participate in the fundraising?
According to Takkar, it’s a different situation now compared to a few months ago. “Certainly, the promoters are very nervous about putting more money in, again looking at history and what they did in 2019 and where they ended up. I think it was a legitimate concern to say, 'We need to address the problems with the industry.'”
“I am confident that we will get all the support from the promoters, they have been supportive in the past," he said. "They will get a chance to participate in whichever route that we go with and I remain optimistic about their continued support as we go forward, just as in the past."
Yet, analysts are not fully convinced.
“We do not see Vodafone [Idea] surviving without a tariff hike for long. It has other liabilities to service such as Rs 6,000-crore NCD payment from December 2021,” ICICI Securities said. The carrier, it said, also needs to renew bank guarantees worth Rs 12,000 crore in the next 12 months.
According to the brokerage, Vodafone Idea needs to raise debt and equity funding to accelerate investment and meet other liabilities, and securing that without a tariff hike will be difficult. It sees a possibility of 30-40% tariff hike in the near future in popular 4G prepaid and postpaid categories.
Takkar said the industry has not been disciplined but Vodafone Idea has been.
“There’s a fine line between being disciplined and to actually price yourself out of the market. We have done that to the best of our abilities," he said. "But overall, we know that the pricing in the industry has to go up.”
Vodafone Idea said the government expects carriers would improve pricing after the recent relief package. It's going to improve the profitability, and the quality of services provided to consumers will get better, said Takkar.
But will that be enough to get investors to participate in the fundraising?
“It’s our job to provide them visibility on what those returns will look like,” Takkar said. “We will have a very good profile; we will have the ability to show very good returns to potential investors.”
Watch the full interview here: