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Vodafone Idea Rights Issue: Improving Signals

In a sector that has been in a churn for a decade now and more so in the past couple of years after the entry of Reliance Jio into the telecom arena, even the last couple of entrenched incumbents have struggled to retain their revenue and subscriber market shares.

Bharti Airtel and Vodafone-Idea — the companies that, along with Reliance Jio, essentially make it a three-player mobile services market — have had to periodically raise funds to take on competition and win back their ceded space, at least to some extent.

In this light, Vodafone Idea has come out with a rights issue to raise funds for it to service spectrum costs payable to the Department of Telecommunications (DoT) and build capex that would be sufficient for at least a couple of years.

Existing investors can subscribe to the rights issue being offered at Rs. 12.5 apiece. The offer price is at a 60 percent discount to the pre-rights share price of Vodafone India (Rs. 32). Of course, the stock price adjusted for the rights issue immediately after the announcement at the end of last month. Even compared with the current market price of Rs. 17.25, the rights offer is priced at an attractive discount of nearly 28 percent. The entitlement is 87 shares for every 38 shares held.

The current debt-equity ratio of the company is 1.78 times, which Vodafone Idea hopes to bring down to around 1 time after this issue.

Vodafone and Idea have committed a total of Rs. 18,250 crore by participating in this rights offer. In case the minority shareholders do not participate in full, the promoters may have to step in to pump in additional amounts.

In a market where the only other operational listed player, Bharti Airtel, is barely profitable and trades at a three-digit trailing price-earnings multiple, it would not be appropriate to take a relative call.

An increasing 4G base, higher data usage, rationalization of pre-paid tariff packages to improve ARPU (average revenue per user), and synergy benefits of integration are likely to put Vodafone Idea back on the railing to take on competition. Vodafone’s enterprise business also holds promise given its large corporate client base and presence across the country. In the nine months of FY19, the company reported a revenue of Rs. 25,892 crore and an operating profit (EBITDA) of Rs. 2,832 crore. The two companies merged in August 2018.

Increasing connectivity

Over the past couple of quarters, the competitive intensity on tariffs has stabilized, with Reliance Jio not making any fresh cuts on call or data rates. This bottoming-out of tariffs has brought a semblance of stability for other mobile operators.

Despite massive gains by RJio, Vodafone Idea still has 38 percent of the subscriber market share and 32 percent of the revenue market share as of December 2018. The company needs to increase revenue productivity from subscribers. In this regard, Vodafone Idea voluntarily rationalized customers who recharged with very little amounts and could thus not be profitably serviced. The company has brought in a minimum recharge pack of 35 so that it is able to provide services sustainably.

Good calls

Over the last few quarters, the firm has also brought down the number of pre-paid plans to five, and offers bundled data and voice packs, as other players in the fray do. It has done away with the practice of offering voice-only packs.

In the past three quarters, data usage by Vodafone Idea customers has steadily increased. From 5.1 GB in the middle of last year, data consumption has increased to 6.3GB as of December 2018. As data consumption improves, the ability to monetise increased usage would be better.

Also, the number of 4G customers has increased from 57.4 million to more than 75 million as of December 2018, indicating that Vodafone Idea is chasing customers with the propensity to deliver higher data usage and ARPU for the company.

Vodafone Idea may sell an 11.15 percent stake in Indus Towers to raise around 5,000 crore. The company is also looking to monetize its fibre assets.

Synergy benefits of the Vodafone-Idea integration has started to kick in. The company expects an annual cost saving of Rs. 8,400 crore during FY21, a couple of years ahead of the original target. By integrating and rationalizing customer outlets, networks, towers and office spaces, the company appears well-placed to trim costs.

By integrating networks and reducing roaming costs, Vodafone Idea may be able to up-sell data services to 2G customers and offer 4G coverage in all the 22 service areas in the country.―The Hindu Business Line

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