Govt’s equity conversion is a necessary but not sufficient condition for Vi

While the government’s decision to opt for equity conversion instead of interest payments due from Vodafone Idea (Vi) removes an overhang, large fund infusion from promoters/investors will be crucial for the company to repay near-term dues and sustain investments.

The government on Friday asked Vi to convert the net present value of interest related to the deferment of spectrum auction instalments and aggregate gross revenue dues into equity shares.

The conversion of Rs 16,133 crore into equity will make the government the largest shareholder in Vi with 33 per cent stake.

An analyst at a domestic brokerage believes the government’s presence as an equity partner in the company (although it has refrained from an operational role), its commitment to maintaining the current three-private player market, and its expectation of near-term fundraising is an important first step towards stabilising operations.

While this is positive, it is not enough to overcome multiple challenges the company is up against — be it debt, lack of investments in the network, or smaller customer base, observe analysts.

Says a head of research at a foreign brokerage, “To catch up with the kind of investments peers have made, Vi will need at least $3-4 billion (Rs 30,000 crore) to start with. Investment estimates of up to Rs 5,000 crore from promoters are not sufficient. A large payout to the government is at any rate coming up over the next four years.”

The total gross debt of the company as on September 30, 2022, stood at Rs 2.2 trillion.

This comprises deferred spectrum payment obligations of Rs 1.36 trillion (including Rs 17,260 crore towards spectrum acquired in the recent auction) and adjusted gross revenue liability of Rs 68,590 crore that is due to the government.

Debt from banks and financial institutions stood at Rs 15,080 crore as on September 30, 2022.

Among its key vendors, Vi is struggling to repay Indus Towers. The latter has already made a provision of Rs 5,300 crore towards receivables from Vi; the figure is expected to go up if more funds are not raised.

While the company has been able to service its debt repayment obligations through internal accruals, as well as by delaying vendor payments, CARE Ratings believes that long-term financing is necessitated in the form of equity infusion or debt, which continues to remain a key rating monitorable.

Brokerages believe it will be an uphill task to bring in new investors, given the $30 billion of debt. This makes it difficult to make money for equity investors unless operating profits rise significantly.

The company is making pre-Indian Accounting Standards 116 (Ind AS 116)-adjusted operating profit of about Rs 8,000 crore annually, while it needs to make Rs 25,000 crore to sustain its operations, pay interest liabilities, and make investments, says an analyst.

To achieve this level of operating profit, the company will have to expand its customer base and raise tariffs, which could translate into a higher market share and average revenues per user.

The data for November 2022 indicates that Vi lost 1.8 million gross subscribers (subs) over the previous month (October 2022), with the loss at a net level of 2 million. This is the seventh consecutive month of active subs moving out of its network and the market share loss, given outages in key markets expected to persist.

CLSA analysts Deepti Chaturvedi and Saurabh Malhotra point out that capital expenditure (capex) for nine months in 2022-23 was Rs 3,260 crore — about 80 per cent below Bharti Airtel’s India spend.

The capex lag is unlikely to narrow with the ongoing fundraising delay. With Airtel and Reliance Jio ramping up 5G and targeting pan-Indian coverage by December 2023/March 2024, it will add risk to Vi’s 21-million postpaid subs (who account for over 25 per cent of revenue) since these high-end subs will likely steer 5G adoption in the country, add CLSA analysts. Business Standard