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Will Rs 25,000-Crore Rights Issue Solve Vodafone Idea’s Problems?

India’s largest telecom company plans to raise as much as Rs 25,000 crore from its latest rights issue at less than a tenth of its valuation to pare debt and fight disruption brought about by the newest entrant in the sector.

The promoters of Vodafone Idea Ltd.—Vodafone Plc. and Aditya Birla Group—valued the company at nearly Rs 92,000 crore, or Rs 130 per share, nearly two years ago when the merger between Vodafone India and Idea Cellular Ltd. was announced. The company now looks to raise funds from existing investors at Rs 12.5 per share in the two-week long issue which opens on April 10.

To be sure, stiff competition—including dirt-cheap tariff plans by Reliance Jio Infocomm Ltd.—worsening financials and a delay in the merger led to a decline in the company’s valuation. Shareholders have infused nearly Rs 40,000 crore in equity in the last two years, including their contribution in current rights issue.

The issue is priced at a discount, allowing existing investors to boost their holdings at a lower price, but Deven Choksey, managing director of KRChoksey, said the stock won’t generate returns soon. The company might need more capital till its capex programme is over, he said, adding that the rights issue won’t help the company enough. “The rights issue is largely meant for investors who are looking to stay invested at least for the next five years.”

A Mountain Of Debt

Vodafone Idea’s debt is over Rs 1,23,000 crore and its leverage ratio stands at 33.3 times its earnings before interest, tax, depreciation and amortisation for FY19. The proposed fund infusion would lower the company’s debt by only 20 percent and reduce the leverage ratio to 26.5 times its Ebitda, according to BloombergQuint’s calculations. That’s higher than that of Bharti Airtel Ltd. and Reliance Jio.

The company is in the process of selling its stake in Indus Towers—valued at nearly Rs 5,500 crore—and expects to realise Rs 8,400 crore as merger synergies, boosting its Ebitda in the year through March 2021. Despite these efforts, Vodafone Idea’s leverage would remain elevated compared with its peers.

Avinash Gorakshakar, head of research at Joindre Capital Services, said that even after the rights issue, debt on the company’s books would be high. “If there’s a 5G auction, they might need additional funds which could lead to further dilution.”

Fund Infusion And Equity Dilution

Multiple brokerages like CLSA, JMFinancial, HDFC Securities, Edelweiss and Motilal Oswal have said that the planned fund infusion will support Vodafone Idea’s operations over the next six-eight quarters, and it might need another infusion after that. BloombergQuint had reported in March that the current fund infusion will dilute the company’s equity base by nearly 70 percent. If the company undertakes similar infusions in the future, it would lead to further equity dilution for minority shareholders.

Adverse Industry Dynamics

Vodafone Idea lost over 3.5 crore active subscribers in the last nine months due to intense competition and its focus on better-paying customers. However, if the company continues to lose subscribers, then its revenue growth would remain weak.

Worsening Financials

The telecom company reported a net loss of close to Rs 15,150 crore in the nine months ended December. The company might continue to report losses for the next two fiscals, according to the consensus estimate of analysts tracked by Bloomberg. The losses will not only erode the company’s net worth but will also stress its financials.

That, according to Sanjesh Jain, telecom analyst with ICICI Securities, means the company is walking a very tight rope. It requires significant market repair to improve its financial strength, he said in a note.

Vodafone Idea expects that the rights issue, stake sale in Indus Towers and sale of its fibre assets will help to alleviate its funding concerns, the company said in an interview with BloombergQuint.

The company is also confident that it won’t need another round of fund infusion. “We are very confident that the rights issue plus the Indus (Towers) monetisation and the cash generated from operations will be sufficient for a long haul,” Balesh Sharma, chief executive officer of Vodafone Idea, said. “Fibre monetisation and incremental revenue uptick through increasing coverage and capacity will be sufficient for Vodafone Idea.”

The company is likely to report marginal revenue growth in the quarter ended March 2019 due to rising 4G subscribers on its network and the steps taken to improve its average revenue per user.

Sameer Kalra, founder of Target Consulting, advised investors to ‘Oversubscribe’ to the rights issue. On-ground cost cuts, fund infusion, sale of tower and fibre assets and a possible tariff hike could boost the company’s financials, he said. “Expect Reliance Jio to hike tariffs as it shifts its focus to home broadband which will benefit Vodafone Idea as it isn’t a competitor in that segment.”

Link To Reliance Jio

Some analysts tracking the sector expect tariffs to increase, benefiting Vodafone Idea. The hike could possibly be led by Reliance Jio, said Rajiv Sharma, co-head of research in SBICAP Securities. The rollout of 5G and monetisation of tower and fibre assets could nudge Reliance Jio to hike tariffs as it will increase operator costs, he said.

Twelve of the 25 analysts tracking the company have a ‘Sell’ rating on the stock, while seven suggest a ‘Hold’, according to Bloomberg data. The 12-month consensus target price for the stock suggests a return potential of nearly 10 percent.

Watch the full interview here