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Vi giving major equity to govt makes it appear weaker to investors

Vodafone Idea (Vi), the third-largest telecom operator in India, has been the talk of the town for the last few days post giving away a major stake in the company to the government. The telco wanted to reduce the debt burden, which it has, but the cost was too high. With the government holding such a major piece of the company, it will appear weaker now.

“Vi can now find it more difficult to attract investors as such a big equity dilution (at a lower trading value of Rs10 per share) with government being a majority stakeholder makes it appear weaker,” Charu Paliwal, an analyst at Counterpoint Research, told TelecomTalk, adding that the news is positive for the telco to stay afloat, but it will not be enough to attract the investors.

According to Paliwal, the move from Vodafone Idea regarding giving away equity to the government will now further strengthen the position of its rivals, including Reliance Jio and Bharti Airtel.

In a statement, Bharti Airtel had said that it wouldn’t be going for the equity conversion option, and the same was expected by Vodafone Idea as well.

Vodafone Idea needs to work on bringing its capex up to ensure that its 4G networks are growing at a rapid speed to compete with the rivals. The telco also needs funding from investors to ensure that it can participate in the 5G spectrum auctions in full capacity.

“Government bailing out Vi is a positive news for the company to stay afloat but this will not be enough to attract investors. Operator also needs to work on its market competitiveness by bringing capex levels at par with other private telcos, expand 4G network and grow ARPU to attract investors,” said Paliwal.

Despite the recent tariff hikes, the average revenue per user (ARPU) level of the telco is not where it should be. According to Motilal Oswal, Vodafone Idea needs another tariff hike to increase its ARPU by 1.9x from now for reaching a self-sustainable level.

Motilal Oswal said that capex levels need to go up as it will help the telco in reducing the subscriber churn rate.

While the government has said that it won’t interfere with the business of a private telco and exit as and when the company has attained stability, it won’t happen anytime soon, believes Paliwal. The government stake might even grow further in the future if Vodafone Idea is unable to turn the business around for good.

“Although the government has made it clear to exit the business once it stabilises, but we don’t see that happening in near term. Vi will have to turn around its business to prevent government stake further getting increased when subsequent dues become payable after moratorium period ends.” TelecomTalk

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