What Will It Take To Save Vodafone Idea...
If billionaire Kumar Mangalam Birla’s worst fears come true, India’s telecom industry could see another shakeup, turning it into a duopoly.
“If we are not getting anything, then I think it is end of the story for Vodafone Idea,” Birla, chairman and co-promoter of Vodafone Idea Ltd., said in December, pitching for relief from thousands of crores in statutory dues. “It doesn’t make sense to put good money after bad...we will shut shop.”
That threatens to cripple the nation’s telecom industry, already bruised by free calls and cheap data onslaught of Reliance Jio Infocomm Ltd. Asia’s richest man Mukesh Ambani’s carrier drove smaller players out and forced Vodafone India and Idea Cellular Ltd. to merge, creating India’s largest telecom operator. That didn’t help as the combine kept losing users, reported losses and accumulated a huge debt.
BloombergQuint analyses if that means end of the road for Birla-Vodafone controlled operator and what can help it survive:
Why Vodafone Idea Needs Help
The Department of Telecommunications has sought close to Rs 44,200 crore in adjusted gross revenue dues from Vodafone Idea. Of this, it needs to pay Rs 35,800 crore and the rest will be borne by promoter Vodafone Group Plc.
The carrier’s current market capitalisation is close to Rs 12,900 crore, about a third of its AGR dues. And a 75 percent plunge in share prices since the last round of capital-raising in March 2019 rules out the possibility of raising more funds from the market again. To add to its woes, the company’s promoters are reluctant to put in more money.
Vodafone Idea’s debt and leverage ratio are the highest among peers. Though most of its debt is owed to the government and payments are staggered over a long time, the company is finding it difficult to repay. Vodafone Idea, according to a Bloomberg report in October, sought better payment terms from creditors amid mounting losses. It warned lenders that it won’t be able to honour its commitments for long under the current conditions, the report said quoting people aware of the matter.
The company denied any such talks with lenders. While it had Rs 15,400-crore cash as of September, Vodafone Idea has been burning cash as its revenue doesn’t cover costs. And free cash flow turned negative since the completion of the merger.
The operator had no source of cash to pay its liabilities and was entirely dependent on the government’s payment relief, Motilal Oswal Financial Services Ltd. said. “It has cash merely to continue operations for the next two-three quarters,” the brokerage said in a report.
To be sure, Vodafone Idea, along with peers, increased tariffs by an average of 30 percent in December to improve financial health. But multiple brokerages said even that wouldn’t suffice. While CLSA said the company would still struggle to fund its spectrum and capital expenditure payments, Axis Capital and New Street Research said it needed 70-75 percent higher average revenue per user to meet its expenses.
Moreover, raising raising additional and servicing debt would be very tough.
What Could Save It
There are two ways of saving Vodafone Idea from shutting down: relief from the government or steep tariff hikes could.
Saving the operator from bankruptcy may be in the government’s interests because statutory dues contribute 80 percent of its debt. If it fails, the government could lose bulk of that, besides adding to non-performing assets of Indian lenders yet to recover from one of the world’s biggest bad-loan crises.
India is open to hearing wireless carriers’ suggestions to help ease payment of their overdue dues, Bloomberg reported on Friday. Stripping out interest from the dues or paying the amount in tranches are some ideas that the government can discuss, Bloomberg reported quoting a government official aware of the matter.
An independent panel can examine such requests provided the companies commit to pay some amount immediately, the official said.
According to Rajiv Sharma, head of research at SBICAP Securities, waiving the interest and penalty components would “definitely save” Vodafone Idea from shutting down as they form nearly 75 percent of the total due amount.
Otherwise, a combination of tariff hike and staggered payments will be required, he told BloombergQuint. Vodafone Idea had an ARPU of Rs 107 in the second quarter ended September. For it to survive, Sharma said, the ARPU must nearly double to Rs 200, “assuming it would be very optimistic”.
But such a steep increase in tariff can’t be implemented without a floor price for the entire industry, Sharma said. Along with this, payments need to be staggered over a period of 10-15 years, linking payouts to profitability, he said.
To be sure, India’s telecom operators moved the Supreme Court on Monday seeking permission to negotiate with the DoT on schedule for payment of AGR dues.
In a separate article, Economic Times reported quoting people aware of the matter that Vodafone Idea may offer the government a small part of its statutory dues by Jan. 23 to avoid a defaulter’s tag.
Vodafone Idea has yet to respond to BloombergQuint’s emailed queries.
Some of the brokerages are hopeful of relief to telecom operators:
- IIFL: The government may spread out payments over 10-20 years, along with this a tariff hike is a feasible combination.
- Edelweiss: The government will have to grant a waiver/deferment to preserve the three-player market structure.
- Jefferies: Expects a moratorium on AGR dues for two years and staggered payments post that over a period of time, aiding cash flows.