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Vodafone’s India Demise Would Cause Wave Of Pain

Vodafone is staring at the abyss on the subcontinent. Shares in the company’s Indian unit plunged 25% on Friday after a court dismissed a plea by telecom operators to review an order to pay the government billions of dollars in levies relating to licence and spectrum fees. Vodafone Idea alone owes as much as $7 billion. Even if collection is delayed, the financial burden will be unsustainable.

The company’s finances are a disaster. It has net debt of more than $14 billion, or almost 8 times annualised EBITDA for three months to the end of September.

That is already pushing the upper limit, and paying the dues within the week, as currently required, would push up the ratio to over 11 times. Vodafone Idea’s market value is now only $1.8 billion. Rival Bharti Airtel also faces a large bill, but it has stronger finances and has managed to raise funds by selling shares.

Although New Delhi could use the funds from those that can pay to patch holes in its budget, it will cause enormous damage, almost certainly pushing Vodafone Idea into bankruptcy. The economy is fragile and is expected to grow just 5% in the current financial year, the slowest pace since 2013. Consumption, investment and exports all remain weak.

The government won’t get much money from the company that owes it the most of the telecoms operators if it collapses. As well as the loss of precious high-quality jobs, the demise of Vodafone Idea will likely turn India’s telecom market into an unhealthy duopoly dominated by Mukesh Ambani’s Reliance Industries. The failure would also saddle lenders, already stressed, with even more bad debt.

Worse hit, perhaps, will be sentiment. Vodafone Idea’s failure would serve as devastating confirmation that even businesses that play by the rules can struggle to survive in a country where the cost of capital is high, and decision-making by judges and politicians is unpredictable.

An easy payment schedule from New Delhi might allow Vodafone to limp along, but it will have little hope of placing competitive bids in any upcoming auctions for 5G airwaves. That will weaken the company in the longer term. For India, though, that outcome may still be better than inaction.―Gadgets Now

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