Vodafone Idea ‘still hanging by a thread’ as India takes stake

Vodafone Idea’s decision to hand a one-third stake to India’s government is not enough to secure the mobile phone company’s future, analysts say, as questions remain about how it will shore up finances to compete with market leaders Airtel and Mukesh Ambani’s Reliance Jio.

Vodafone Idea said on Tuesday it will let the government own 35.8% of the company instead of paying 160 billion rupees ($2.16 billion) in interest on accrued telecom spectrum fees and other dues.

The move highlights cash flow problems that have bedeviled the debt-laden company, formed in 2017 as a joint venture between the U.K.’s Vodafone and Idea Cellular, part of Indian conglomerate Aditya Birla Group. Vodafone Idea held about 23% of the country’s cellular market in October, against Reliance Jio’s 37% and Airtel’s 30%, according to the Telecom Regulatory Authority of India. State-owned Bharat Sanchar Nigam and its subsidiaries accounted for the rest.

Vodafone Idea shares fell 20.5% to 11.80 rupees on Tuesday’s news. The firm’s market capitalization stood at 339 billion rupees, about one-tenth of Airtel’s 3.93 trillion rupees. In December, research firm Jeffries had valued Jio at $96 billion, or about 7 trillion rupees.
The government becoming the largest shareholder avoids a cash crunch over the interest payments and avoids leaving India with an effective duopoly in mobile telephony.

But it remains to be seen whether Vodafone Idea “can raise additional capital to stay relevant,” said an analyst at a domestic brokerage firm who requested anonymity. “The government is unlikely to invest any capital. It will be unprecedented if it does. It all depends on whether the promoters [Birla and Vodafone] will invest more, which will boost the confidence of potential backers.”

Kumar Mangalam Birla of Aditya Birla Group stepped down as chair of Vodafone Idea in August and, a month later, the company said the promoters were not considering any proposal to infuse additional capital into the business.
With the government stepping in, Vodafone Group’s stake in the mobile firm will shrink from 44.3% to 28.5% while Aditya Birla Group drops from 27.6% to 17.8%.

“The government coming in doesn’t change anything in terms of a competitive landscape as they are not infusing any capital,” Ambit Capital analyst Vivekanand Subbaraman told Reuters.

Vodafone Idea’s ability to offer the government equity results from a relief package for India’s telecom companies in September, after firms failed to reduce accumulated spectrum payments and adjusted gross revenues (AGR) dues, the annual license fees that telecom companies must pay India based on a revenue sharing model.

Both Vodafone Idea and Airtel have opted to defer payment of what they owe by four years. India’s Department of Telecommunications allowed the companies 90 days to decide whether they want to pay interest on the dues during the moratorium or convert the interest into equity.

Airtel, which raised 210 billion rupees through a rights issue in August, said this month that it will pay interest on its dues. Airtel owes the government around 995 billion rupees.

Vodafone’s spectrum payment obligations alone total 1.086 trillion rupees, along with AGR liabilities of 634 billion rupees. The company’s net debt in the July-September quarter totaled 1.945 trillion rupees, including 227.7 billion rupees owed to banks and financial institutions. It is scheduled to repay lenders about 60 billion rupees between December 2021 and March 2022.

“While the government’s telecom package has eased Vodafone Idea’s burden from a cash flow perspective, the company will require external support for its upcoming … repayments,” analysts at Edelweiss wrote in a recent report in which they described the company as “still hanging by a thread.”

“Vodafone Idea continues to suffer from disproportionally higher debt versus EBITDA,” the analysts added. “We believe this can only be solved by raising funds and hiking tariffs in its core 4G prepaid segment at the earliest. In the absence of both these steps, the industry might move toward a duopoly, in our opinion.”

In March 2017, when Vodafone and Idea Cellular agreed to merge, the firms claimed that the combined entity, with about 400 million customers, would command a 35% market share by user base. But the company since has steadily lost market share to Airtel and Jio, the upstart that turned the telecom market on its head by undercutting competitors.

Vodafone Idea claimed 253 million users in the July-September quarter, while average revenue per user (ARPU) stood at 109 rupees. In comparison, Airtel claimed 355 million users and an ARPU of 153 rupees, while Jio had 429 million users with an ARPU of 143.6 rupees in the same period.

India’s stake in Vodafone Idea contrasts with the aggressive privatization push by Prime Minister Narendra Modi’s government, which has been raising capital by selling its stake in public and private sector companies.

Finance Minister Nirmala Sitharaman had said the government intended to raise 1.75 trillion rupees via divestment in the year ending March 2022. According to the Department of Investment and Public Asset Management, a Finance Ministry body, the government has managed 454.85 billion rupees through divestment, which includes its stake sale in Air India to the Tata Group, and dividend receipts.

It expects to raise another 1 trillion rupees through a stake sale in the initial public offering of Life Insurance Corporation of India, scheduled to list on the bourses in the January-March quarter.

“This needs to be looked at in the larger context of the divestment program, where the government is looking at exiting some of its investments,” said Pranav Haldea, managing director at Prime Database, a data company focused on capital markets. “This is a step in the opposite direction where it is acquiring such a large stake in a private company.” Nikkei Asia