The inevitable has happened. Vodafone Plc is looking to exit the business, and with it, its Indian partners, the Birlas too. BSNL, with which a merger is recommended has no experience with 4G services. Even if the government, in the backdrop of nursing an ailing BSNL with a relief package of Rs 70,000 crore by some stroke decides to purchase stake of the Aditya Birla Group in Vodafone Idea, it will not be making any investment in Vodafone Group Plc.
Having said this, Vodafone Idea Ltd, despite being on the brink of financial collapse, has as yet, unlike its two predecessors, Aircel and RCom, not filed for insolvency resolution and pursued the IBC route nor defaulted on any debt, giving no creditor reason to initiate an insolvency resolution filing.
Vodafone Plc has offered its 45 per cent stake and the Indian promoter group, which includes Kumar Mangalam Birla and Aditya Birla Group firms its 26 percent stake in Vodafone Idea for free to Indian banks and financial institutions or to BSNL, provided they take over the wireless telephony company. Deutsche Bank estimates that to sustain itself the telco in total will require Rs 1 lakh crore in financial relief by means of equity infusion, a Rs 220 ARPU, and some relief on the GST and AGR front.
Kumar Mangalam Birla has stepped down as Chairman, Vodafone Idea and Himanshu Kapania has been elected as non-executive chairman by the Board.
Vodafone finds itself in this situation not due to a lack of effort or commitment on its part. To synergise assets and revenues Vodafone India merged with Idea Cellular; Vodafone Idea (Vi) tried to raise funds from potential investors as an Oak Hill-led consortium, US private equity firms including KKR, besides Canada Pension Plan Investment Board, Caisse de Dépôt et Placement du Québec (CPDQ) and Norway’s Government Pension Fund Global; proposed to dilute assets worth Rs 7500 crore; appealed to the Supreme Court to take a relook at AGR calculations, sought permission for a one-year moratorium on payment of spectrum instalment of Rs 8,200 crore, due on April 2022; requested TRAI to clear floor pricing, these are only a handful of some obvious efforts. Only when all failed, did the international telco decide to give up on India.
This is really a sad tale. For the financial year ended March 2021, Vi announced a negative net worth of Rs 38,224 crore and a gross debt (excluding lease liabilities) of Rs 180,310 crore. The company had a net loss of Rs 44,233 crore on revenues of Rs 42,126 crore.
It owes the government Rs 96270 crore in spectrum payment dues and Rs 58254 crore in AGR liabilities (of which Rs 7854 crore has been paid), the banks have a major stake here since Rs 28740 crore of this is borrowed from them.
The telco lost over 23 million users in the last fiscal year. In FY22, its liabilities include AGR payment to the government of Rs 8292 crore in March 2022, annual spectrum payment of Rs 8,200 crore in April 2022, and an expiry of Rs 7,039 crore bank guarantees or about Rs 23,400 crore.
Its cash flows are just not enough to meet the liabilities. On March 31, its liquid assets included Rs 350 crore cash and cash equivalents, and land and tax refunds worth Rs 3,000 crore. Consolidated loss is Rs 7022.8 crore for quarter ended March 2021. Total income declined by 19 percent to Rs 9647.8 crore from Rs 11920.4 crore in the corresponding quarter of 2019-20.
The telco despite adding 43,500 4G FDD sites through refarming of 2G/3G spectrum to expand 4G coverage and capacity during the last fiscal year ended March 2021 lagged behind its competitors. Vodafone Idea’s total site count is at around 180,000 compared to Airtel’s 240,000 sites and Jio’s 300,000 sites. This gave Vi a setback of 630 basis points in revenue market share (RMS) over the last 12 months.
“As a country we do need three players… it is a large enough country with 1.3 billion people, which can easily accommodate three (private) players in this market. There is clearly a situation of serious financial stress in the industry. We hope that the government does something to provide some relief to the industry.
ARPU in India is extremely low and at this level, our return on capital is in the low single digit. ARPU must rise. If ARPU rises, first to Rs 200 and eventually to Rs 300, the industry repair can certainly happen.”
Its success overseas is no secret. Nick Read’s and Margherita Della Valle’s (CEO and CFO respectively) recent earnings call announcing Vodafone Group Plc Q1 2022 results indicate an accelerated shareholder value, and a distinct focus on portfolio optimization. A 3 percent service revenue growth in the quarter ended March 2021 with Vodacom maintaining strong momentum particularly in financial services, which were up 34 percent in Q1 indicate the telco is well on-track to deliver growth this year, both in Europe and Africa.
Is it the case of the government killing the goose that laid the golden egg? Not finding the license fee and spectrum usage charges adequate, the government at the outset demanded a share from rent, dividend and interest income to profit on sales of fixed assets, et al. It now stands to lose not just today, but also in times to come, and not just financially, it may find the pace of the entire digitization process compromised.
As the telco crumbles, the government and the regulator have so far maintained a safe distance. The Indian Supreme Court in all its wisdom has upheld the government’s demand.
As aptly put by Deutsche Bank AG’s telecom analyst Peter Milliken, “If the third-largest service shuts, and customers scurry off to Jio and Bharti, it’s hard to see how India will recoup its payments. India is the most painful market we have come across to operate a telecom. Prime Minister Narendra Modi’s government now needs to make a call — duopoly or state control of Vodafone Idea.”
STOP PRESS. Last night, the ministry of finance announced that in a bid to bury the ghost of retrospective taxation, the government brought a bill in the Lok Sabha to withdraw all back tax demands on companies such as Vodafone and that it will refund the amount paid in these cases without any interest thereon. Using that law, tax authorities in January 2013 slapped Vodafone with a tax demand of Rs 14,200 crore, including principal tax of Rs 7,990 crore and interest. This was in February 2016 updated to Rs 22,100 crore plus interest.
However, it may have become too late now, and unless some other serious measures are also announced, India may have lost Vodafone forever!