Vodafone Idea Stares At Severe Liquidity Stress

Exterior of Vodafone Idea store (Source: BloombergQuint).  

Vodafone Idea Stares At Severe Liquidity Stress

Vodafone Idea Ltd., the loss-making Indian wireless carrier, stares at a severe liquidity crisis as a chunk of liabilities come up for payment in the next one year.

The beleaguered telecom operator has Rs 23,200 crore worth of liabilities due in the next 12 months, according to ICICI Securities. That includes:

  • Annual payment (including interest) towards statutory adjusted gross revenue liability of Rs 8,000 crore in March 2022.

  • Bank guarantees worth Rs 7,000 crore due to expire during the next 12 months.

  • Annual payment towards spectrum of Rs 8,200 crore due in April 2022.

In comparison, Vodafone Idea’s liquid assets include Rs 350 crore cash and cash equivalents, and land and tax refunds worth Rs 3,000 crore.

The carrier has asked lenders to dilute collateral to help it raise fresh funds, the Mint reported. BloombergQuint awaits Vodafone Idea’s response to emailed queries on debt payments and collateral.

Akshaya Moondra, chief financial officer at the carrier, had said during its fourth-quarter earnings call that it expects tax refunds.

“The company is entitled to [Vodafone-Idea merger] tax refunds of Rs 8,300 crore. Of this, Rs 1,500 crore has been received so far, and Rs 6,800 crore is yet to be received,” Moondra said. The carrier expects another Rs 1,500 crore in goods and services tax-related refunds, which have just started coming in, and land value in FY22, he said.

Vodafone Idea hasn’t reported an annual profit since Vodafone Group Plc’s India unit and Aditya Birla Group’s Idea Cellular announced their merger in 2017, driven by a cut-throat tariff war unleashed by Mukesh Ambani’s telecom unit. Since then, the merged unit has lost subscribers and accumulated a massive debt.

The carrier was also worst-hit by the 2019 court order that asked Indian wireless operators to pay the government thousands of crores in pending fees. That only pushed the operator to the brink of closure, raising the possibility of turning the market into a duopoly.

  • Vodafone Idea suffered a net loss for the eleventh straight quarter in the three months ended March. The company’s net loss widened to Rs 7,023 crore in the January-March period from Rs 4,532 crore in the three months ended December.

  • Its net worth has turned negative Rs 38,228 crore at the end of FY21 from a positive Rs 5,980 crore at the end of FY20.

  • Gross debt (excluding lease liabilities) as on March 31, 2021, was at Rs 1,80,310 crore. That comprised deferred spectrum payment obligations of Rs 96,270 crore and AGR liability of Rs 60,960 crore. It also included debt from banks and financial institutions of Rs 23,080 crore.

  • Net debt stood at Rs 1,79,960 crore in the quarter ended March 2021, up 53.7% sequentially and 59.9% over the year earlier.

According to Vodafone Idea’s auditor SR Batliboi & Associates LLP’s report, the company’s “ability to continue as a going concern is dependent on its ability to raise additional funds as required, successful negotiations with lenders on continued support, refinancing of debts, monetisation of certain assets, and generation of cash flow from operations that it needs to settle/renew its liabilities/guarantees as they fall due.”

Weak liquidity, Motilal Oswal said, is also restricting the company’s capability to invest in network improvement. Its total capex spend in FY21 stood at Rs 4,150 crore, nearly a fifth of that spent by Bharti Airtel Ltd. (Rs 19700 crore), the brokerage said in a report.

Vodafone Idea, however, is trying to raise Rs 25,000 crore through a mix of debt and equity. Its management, in the post-earnings analyst call, had assured that they are in active discussion with potential investors for fundraising, and expect to raise capital shortly.

Besides, the company has written to the Department of Telecommunications seeking to defer the spectrum payment installment due in April 2022. It even filed a modification application in the Supreme Court for allowing DoT to correct arithmetic errors in the computation of AGR demand, which is currently pending hearing.

“We are very confident that it is not the intent of the government to make us pay for these errors,” Ravinder Takkar, managing director and chief executive officer at Vodafone Idea, said in the fourth-quarter analyst call. “We are quite confident that the Supreme Court will allow the DoT to make adjustments based on those errors and omissions that were done in the first round of calculations of these AGR deals.”

Analyst Views

ICICI Securities

  • Vodafone Idea’s efforts to raise funds have not yielded any outcome yet.

  • Relief from the government on spectrum payment and reduction in AGR liability on the Supreme Court accepting reconciliation are other hopes.

  • The brokerage maintained a ‘sell’ rating on the telecom operator with a target price of Rs 10 apiece, implying a potential upside of 9.9% from Monday’s close.

Yes Securities

  • The debt for the company remains high at 10 times of its FY21 Ebitda with interest coverage ratio of 0.57 times and the operating income is hardly enough to cover interest payments.

  • The company needs to infuse fresh capital and requires support from the government through a moratorium on payment of spectrum dues.

  • There is still no clarity about the timeline of the next tariff hike by the telecom industry.

  • The brokerage has a ‘reduce’ rating with a target price of Rs 8 apiece, implying a potential downside of 12% from Monday’s close.

Motilal Oswal

  • The significant amount of cash required to service its debt leaves limited upside opportunity for equity holders despite a high operating leverage opportunity from any ARPU increase.

  • The current low Ebitda would make it challenging to service debt without an external fund infusion.

  • The continued subscriber churn has diluted the benefits of previous tariff hikes and the company needs to double its ARPU to service its debt in FY22 and FY23.

  • The brokerage has maintained a ‘neutral’ rating with a target price of Rs 9 apiece, implying a potential downside of 1% from Monday’s close.

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