New Delhi: The government’s nod to convert telecom operator Vodafone Idea’s interest dues into equity is expected to free up cash flows for the debt-ridden company and also give a fresh lease of life to its attempts to raise funds, analysts say. However, the company is still vulnerable to losing its subscribers and market-share, they add.
Vodafone Idea informed the stock exchange last Friday that the government had approved the conversion of over Rs 16,133 crore of its interest dues — related to adjusted gross revenue (AGR) and spectrum payments — into equity. The move makes the government the company’s single-largest equity holder with a 33.14 per cent stake.
Following the announcement after market hours, the shares of Vodafone Idea closed Monday at Rs 8.26 a piece, up 19.88 per cent from its previous close on the BSE.
The government’s move is in line with the telecom sector reforms approved by the Union Cabinet in 2021 to address liquidity requirements of the telcos. Among other measures, the Cabinet had given a nod for a moratorium of up to four years for telcos in annual payment of dues, arising out of the Supreme Court’s September 2020 judgement on AGR as well as on dues payments for spectrum previously purchased.
Additionally, the government also gave telcos a one-time opportunity to exercise the option of paying interest for four years on deferred spectrum instalments and AGR dues by converting the Net Present Value (NPV) of this interest amount into equity.
NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.
Vodafone Idea’s board had in January 2022 approved the conversion of the full amount of the interest related to spectrum auction installments and AGR dues into equity, estimating the NPV of this interest to be about Rs 16,000 crore. After over a year of delay, that process is now completed.
On the delay, Telecom Minister Ashwini Vaishnaw had last month said that Vodafone Idea has multiple requirements — including capital infusion — which make the conversion of AGR-related dues into equity a “complex issue”.
The minister said Friday that the government has now decided to convert the interest dues of Vodafone Idea into equity after receiving a firm commitment from promoter Aditya Birla Group to run the company and bring necessary investment.
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Better cash flow, reduced risk of duopoly
According to a research note by brokerage firm BofA Securities India, the government’s move will be positive for Vodafone Idea in the near-term and possibly allow for a capital injection from its promoters, but some “fundamental issues” remain, including under-investment in fiber, 5G, and core telecom infrastructure.
“While VIL promoters didn’t mention how much capital they would inject, media articles stated that they would inject Rs 50 billion,” the note said.
“The government clarified that it will not be bearing the debt of VIL and they won’t be involved in day-to-day running of the company. Post this move, the government will hold 33.14% in VIL making it the largest shareholder,” it added.
“This coupled with potential capital injection by promoters (timing unknown) should help VIL clear pending dues of tower-cos, vendors and invest in 5G.”
However, there was a rider. “While the current government move drastically reduces any risks of VIL going into NCLT (National Company Law Tribunal), we think fundamental issues on VIL remain,” the note said.
BofA Securities India said that its discussions with vendors and mobile tower companies indicated that VIL has significantly under-invested in fiber, 5G and core infrastructure.
“It would at least take $6-8 billion investment to narrow the gap,” it said, adding that with limited visibility on any massive cash injections, it expects VIL to lose market share to Bharti Airtel and Reliance Jio, especially as these companies start improving the 5G network.
Vodafone Idea is yet to begin rolling out its 5G network. In an investor call following the announcement of its results for the quarter ending September 2022, the company’s CFO Akshaya Moondra had said that Vodafone Idea is ready with its plans and is engaged with vendors for 5G rollout.
“So, we believe once the funding is in place we should be able to roll out quite quickly,” Moondra had said. He had acknowledged that the company might be “behind” the competition, but projected an optimistic outlook.
“I do understand that the competition has already started rolling out, so we will be behind them, but given the way that 5G handset ecosystem has now started evolving and it will take some time, so we don’t think it will be a major disadvantage… if we are able to have the funding done in a couple of months and then roll out on that basis,” he had said.
In a research note, J.P. Morgan said that it believes this event [government move] should help Vodafone Idea improve its competitiveness and delay share losses. This, it said, sharply reduces the risk of a duopoly scenario.
Notably, amid delay in government decision in equity conversion and funds shortage faced by Vodafone Idea, concerns had emerged that only two private players — Bharti Airtel and Reliance Jio, would remain.
“This should provide a lifeline to Vodafone Idea that has struggled with an asset-liability mismatch over the last 12 months, impairing its ability to even make vendor payments and invest in capex,” J.P. Morgan’s note said. “It should now be able to raise funds that are critical for debt and vendor payments and also to invest in 4G and 5G capex.”
It also noted that the company had a bank debt of Rs 151 billion as on September 2022, and it had to repay Rs 96 billion by September 2023.
“We believe it should be able to pay this through regular cash flows as it generates Rs 85 billion cash Ebitda on an annual run rate basis,” the J.P. Morgan note said.
During the call, Moondra had also said that the company’s funding discussions are at an advanced stage and it should be able to conclude those once the government conversion is in place.
A Citi Research note, too, said that the latest development could “kickstart a virtuous cycle of events” of Vodafone Idea, especially as far as its “precarious” balance sheet is concerned.
This, in turn, said the note, could see it at least partially clearing outstanding vendor dues and “enhancing 4G investments and announcing 5G rollout plans, on both of which it has been significantly lagging” behind its two peers.
Citi Research also observed that telecom infrastructure provider Indus Towers, which had last month made a doubtful debt provision of Rs 2,298.1 crore against receivables from Vodafone Idea, should be a key beneficiary.
“As per the payment proposal agreed in 2Q, VI had been making part-payments of its monthly dues till December 2022 but was facing challenges in meeting full payments from January 2023 as well as in clearing its past outstanding dues,” Citi Research said.
“If a positive chain of events now leads to VI successfully completing its capital raise and, in turn, begin clearing overdue amounts, Indus should be a key beneficiary with a potential reversal in its receivables trend that has impacted its FCF (free cash flow) generation & payouts.”
Notably, shares of Indus Towers ended at Rs 161.95 a piece on Monday, 12.98 per cent higher than their previous close on the BSE.
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Vulnerable to market share, subscriber loss
Some analysts still have a somewhat bleak outlook for Vodafone Idea. Goldman Sachs, for instance, noted in a research report that given the still-elevated debt profile, continued market share erosion (Vodafone Idea has lost 22 million active subscribers, or 10 per cent of its base, in the last 12 months) and meaningful network gap vs peers, “we see a low probability of Vodafone Idea raising a meaningful amount of external capital”.
“In addition, Vodafone Idea has Rs 96 billion of debt repayment due (in 12 months ending Sep 2023), which could put further pressure on the company’s ability to incur capex in the near term,” Goldman Sachs’ note stated.
“For the company’s competitive positioning to improve, we believe Vodafone Idea will require a substantial amount of capital raise, and/or a tariff increase,” it added.
Espousing similar views, research agency CLSA (Credit Lyonnais Securities Asia) noted that Vodafone Idea is still vulnerable to subscriber and market share losses, as Reliance Jio and Bharti Airtel are rolling out 5G while Vodafone Idea is lagging in even 4G capex spending.
(Edited by Anumeha Saxena)
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