Experts see big cashflow relief for VIL

The four-year moratorium on regulatory payments eases the sectoral stress for now and provides meaningful near-term cashflow relief to Vodafone Idea, analysts have said although they are divided over whether it would offer a permanent fix for issues faced by the ailing telco.

Some experts contended that government may end up holding a ‘sizable’ chunk (estimates varied from 26 percent to majority stake) in VIL at the end of moratorium period, if the telco opts to pay cumulative interest or annual instalments by way of equity. Tariff hikes, argued many, would still be crucial for VIL, despite the relief measures announced.

The government on Wednesday approved a blockbuster relief package for the telecom sector that includes a four-year break for companies from paying statutory dues, permission to share scarce airwaves, change in the definition of revenue on which levies are paid and 100 per cent foreign investment through the automatic route.

The measures, aimed at providing relief to companies such as Vodafone Idea that have to pay thousands of crores in unprovisioned past statutory dues, also include the scrapping of Spectrum Usage Charge (SUC) for airwaves acquired in future spectrum auctions.

“While four-year moratorium would ease immediate cash flow constraints for VIL, it will need to also raise USD 1 billion over next 6-9 months to repay its non-spectrum debt and ride through these four years with minimal capex,” Credit Suisse said.

While moratorium offers VIL a near-term cash flow relief, it may not fundamentally change the company’s long-term debt issues, which are likely to re-surface post the end of moratorium, it said.

Despite the moratorium and equity conversion of interest during the period, “VIL will need an ARPU (Average Revenue Per User) of Rs 240 by FY26 to meet Rs 330 billion (Rs 33,000 crore) of annual spectrum payments and AGR dues which will need to be repaid over the remaining tenure (there is no extension of overall repayment tenure)”, it wrote in a note.

UBS report said that the reform package is “meaningful immediate relief” for VIL, whose annual liability for spectrum and AGR (Adjusted Gross Revenue) amounts to Rs 16,000 crore and Rs 8000 crore, respectively.

The company now has ability to increase capex to Rs 10,000-12,000 crore, which is essential to stop the market share loss. It also improves the telco’s ability to refinance upcoming debt repayments, including debentures due in December and March, it analysed.

The deferral of spectrum payments does not include 2021 auctions, thereby limiting immediate cash benefit for Jio, which had bid aggressively in the 2021 auctions.

“For Bharti, the annual savings from spectrum and AGR deferrals will be around Rs 11,000-11,500 crore,” UBS said.

The 4-year moratorium on payments will offer VIL cashflow relief and “could lead to government taking up sizable stake in VIL”, Jefferies estimated.

Jefferies projected that government could own 26 per cent of VIL at the end of four-year period, if the telco chooses to pay the cumulative interest of Rs 9,000 crore through equity.

Bharti’s usage of its Rs 11,700 crore annual cashflow relief for capex will accelerate market share shifts in its favor, Jefferies said in its report.

Duopoly is still in play, but a bit delayed, it said.

ICICI Securities believes that tariff hike should happen sooner as relief package entirely does not address VIL’s cashflow requirements, and even for raising funds, tariff hike remains critical.

Given with equity option, “in worst case” scenario “VIL can become government entity,” it said.

Kotak Institutional Equities is of the view that the policy measures may salvage VIL’s cash flow situation, without providing any relief on balance sheet or the profit and loss.

Hence, it concluded, VIL may remain a fragile player with a declining subscriber base given its inability to catch up with Bharti and Jio on network capabilities and service offerings.

Prashant Singhal, Emerging Markets Technology, Media & Entertainment and Telecommunications (TMT) Leader at EY, said that going forward, the steps taken will clearly take away some of the uncertainties looming in the sector.

“At the same time, the industry still needs to double ARPU through tariff increase and new revenue streams for the sector to be attractive. In addition, rationalisation of licence fee levies and GST is required,” Singhal said. PTI