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Vodafone Idea’s equity conversion to dissuade investors, hurt fundraising

Analysts see Vodafone Idea Ltd.’s decision to convert interest payment dues into equity to constrain the carrier’s ability to raise fresh capital in the near term, as well as dissuade potential investors considering possible government intervention.

The operator on Jan. 11 announced that it was exercising the option offered by the government, as part of the telecom relief package last year, to convert interest on spectrum auction installments and adjusted gross revenue dues into equity. The conversion will result in dilution to existing shareholders of the company, including promoters. Vodafone Idea will issue equity shares on a preferential basis to the Indian government at a par value of Rs 10 apiece, offering it the largest shareholding with a 35.8% stake.

The process is expected to be over within a month, Ravinder Takkar, managing director and chief executive officer at Vodafone Idea, said in a press conference on Wednesday. But, he said, the government has no desire to run the carrier.

Vodafone Idea estimated the net present value of the interest accrued during the four-year moratorium to be around Rs 16,000 crore.

The announcement caused the telecom stock to lose more than 18% on Tuesday. It, however, rebounded to trade 11% higher as of 1:15 p.m. on Wednesday.

Here’s what brokerages had to say about Vodafone Idea’ equity conversion:

Kotak Institutional Equities
• Exhibits a lack of confidence in large capital-raise in the near term and desirable improvement in cash flows in the medium term.

• Unlikely that VIL will be in any position to service the deferred liabilities in about four years, as it continues to lose subscribers and falls short of desirable investments in the network infrastructure.

• The company’s decision has further strengthened the scenario of a near duopoly market as Bharti Airtel Ltd. and Reliance Jio Infocomm Ltd. will be able to accelerate further market share gains at the expense of VIL.

• VIL is expected to remain behind Bharti and Jio on pan-India network capabilities as well as service offerings.

• The company may reduce its tower network gradually, especially in circles with low revenue/subscriber market shares, and will impact the medium-term prospects of Indus Towers Ltd. (offers infrastructure services to telecom operators).

• Retains ‘sell’ rating on VIL, ‘add’ on Bharti Airtel and ‘buy’ on RIL.

• Significant government holding may dissuade potential investors, considering possible government intervention.

• The decision does not necessarily result in any significant liability reduction, but the government’s presence increases the likelihood of long-term survival of VIL.

• Board structure and management rejig remains key.

• Significant average revenue per unit growth remains critical for the company’s long-term viability. ARPU needs to increase to Rs 250 from the current Rs 109 over the next three-four years for it to sustain the leverage.

• Maintains ‘reduce’ with a target price of Rs 7, a downside of 40.6%.

Goldman Sachs
• The company could find it difficult to raise external capital given such shareholders may face the risk of additional dilution.

• The decision may result in limited free cash flow savings for VIL, while uncertainty around further equity dilution could constrain its ability to raise fresh capital.

• Vodafone Idea’s market share erosion to continue with its capex lagging peers.

• Such erosion could further accelerate in the event Vodafone Idea is unable to increase its free cash flow meaningfully in the near term to make investments in the 5G spectrum and capex.

• Given the weakness in Vodafone Idea’s free cash flow profile, meaningful participation by the company in 5G rollouts is not expected.

• Rates ‘sell’ on Vodafone Idea, ‘buy’ on Bharti Airtel and RIL.


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