NEW DELHI : The website of Vodafone Idea Ltd (VIL), India’s third largest telecom service provider with more than 260 million customers, looks bright and alluring.
“High-speed Internet anytime, anywhere", the home page promises anyone who visits. “Non-stop gaming"; “ad-free music with unlimited downloads"; “free sim delivery at doorstep" are some of its other offers. Yes, the site also wants a visitor to “port your number" to enjoy “exciting benefits".
VIL has put its best foot forward. Nevertheless, it still has a long way to go—there is a pressing need to reduce debt significantly and also invest in infrastructure that would excite customers in the future.
This, despite a significant lifeline from the Indian government last year. On 15 September, union minister for railways, communications, electronics and information technology Ashwini Vaishnaw said the Indian government was serious about sustaining healthy competition in the telecom industry (without VIL, the market would turn into a duopoly and people would be left to choose between Reliance Jio and Bharti Airtel).
The government, he told scribes, also wanted to “facilitate capital investment cycle and destress the balance sheet of the telecom sector". Telcos were granted more time to pay their dues and convert interest payments into equity as part of a rescue plan.
VIL has the largest debt pile among all telecom service providers in India–a mammoth ₹1.9 trillion as of 31 December 2021. Its board subsequently approved a plan to make the government its biggest shareholder with a 36% stake in the company. It opted to convert its dues of about ₹16,000 crore to stock. And earlier this March, VIL’s board approved equity infusion of ₹4,500 crore into the carrier by the promoters and ₹10,000 crore fund raised in tranches from external sources.
The fund infusion from promoters—Vodafone Group and Aditya Birla Group—is expected after the company’s extraordinary general meeting on 26 March. Sources said that the external fund raise will commence soon after the government formally becomes a shareholder.
Nonetheless, some analysts still sense a tricky road ahead. “The announced capital raise will provide some respite but a long and arduous path still remains to be traversed if VIL has to truly make it out of the woods," Hemang Khanna, associate vice president at Kotak Institutional Equities Research said in a note to clients.
His main concern: the announced fundraise still remains minuscule in comparison to VIL’s debt. “It is yet to be seen if any external strategic investors decide to participate in VIL’s upcoming ₹100 billion ( ₹10,000 crore) capital raise, given the underlying challenges that the company faces," he said.
VIL rebuffs such views. It remains confident of the fundraise and future growth prospects.
“The ₹4,500 crore equity infusion by promoters is a start of the fund raise process. It strongly signals promoters’ commitment to VIL. The board has already approved total funding of up to ₹14,500 crore which is seen by the company and board as adequate for the company’s growth requirement," a spokesperson from VIL said.
An executive from VIL who didn’t want to be identified said that there is significant investor interest, and proposals are being evaluated by the company. “The plans have been arrived at keeping the company’s growth and requirements. The fundraise factors in the components that are needed for the company to remain competitive," he said.
“Investors are doing their due diligence and these processes take time. It will happen in the coming months. There is no worry because there are no surprises that has cropped up (in the entire process) and the process is not taking longer than expected," he added.
The executive stressed VIL is here for the long-term. “We have been able to make payments to the bond holders on time. So, it cannot be said that we’re not a long-term player. We have the business plan and the belief of being in it for the long run."
On 13 December, VIL paid holders of non-convertible debentures that matured, averting any financial default.
So, what’s the business plan? We will come to it in a bit. First, let’s rewind to 2016, the year that changed India’s telecom battleground, leading to distress for some companies.
Merger pains
The genesis of VIL’s trouble dates back to September 2016 when Mukesh Ambani, India’s richest man, announced Reliance Jio. His telecom service had the lowest data tariffs in the world and free voice calls. Jio created a record in the very first month of its operations, crossing 16 million subscribers. This sort of a ramp-up was “faster than any other telecom operator or startup in the world", Reliance Industries Ltd said at that time.
All these severely impacted the financials of the other telcos. Having already faced legal trouble due to a retrospective tax law amendment dating back to 2012, the Vodafone Group decided against any further investments in India. Instead, it pooled resources. Vodafone India Ltd merged with Idea Cellular Ltd on 31 August 2018 to become VIL.
The merger saw the debt of both companies— adjusted gross revenue (AGR) liabilities, spectrum renewal payments for 2G and 3G airwaves, new spectrum acquisition costs and operational expenses–become one large mound. Net debt was as high as ₹1.12 trillion as of September 2018, ratings company Crisil had noted.
AGR liabilities are revenue share to the centre that telcos are required to pay in the form of licence fee and spectrum usage charges.
The combined operations were expected to create a giant. VIL had a subscriber base of 408 million in June 2018. However, as of December 2021, the company’s subscribers had dropped to 265 million. Jio had 415.7 million subscribers, whereas Airtel had 355 million. VIL was floundering.
“VIL is cash-starved. So, the low capex compared to Reliance Jio and Bharti Airtel has been one key reason for its inability to retain customers and market share," said a sector analyst who didn’t want to be identified. “Also, Jio is offering 4G in all cities while VIL has 4G only in top cities and limited locations. This has pushed the first-time smartphone user to other networks," the analyst added.
The debt overhang
Today, the biggest issue facing VIL remains its huge debt pile and every effort made by the company towards deleveraging looks only a small step in the larger scheme of things.
Citi Research analysts underlined the uncertainty or the ability of the company to meet its payments to the government after the four-year moratorium period ends. In September last year, India’s cabinet approved a relief package for the telecom sector that included a four-year moratorium on payment of statutory dues.
“It would require far more meaningful tariff hikes, and potentially, further government relief," the analysts said in a report, adding that VIL’s total spectrum and AGR liability at ₹1.7 trillion would imply annual payments increasing from ₹240 billion ( ₹24,000 crore) to ₹400 billion ( ₹40,000 crore) once the moratorium ends.
The VIL executive quoted earlier said that there is a sound debt reduction plan in place. “The company has a customer base and an asset base. Part of the debt which is ₹16,000 crore will be converted into government equity. Additionally, there will be tariff hikes, ARPUs (average revenue per user) will rise which will contribute to revenue generation and higher EBITDA (earnings before interest, taxes, depreciation, and amortization), which can then be used to service the loans," he explained.
The tech cycle
This brings us to the crucial issue of investments in next generation technologies. VIL needs to service its loan, and also invest to stay ahead of the tech curve.
Continued investments in building 4G networks ensure high speed data availability to consumers. Now, all the carriers, including Bharti Airtel and Reliance Jio, are preparing to acquire 5G airwaves—the next generation of high-speed internet that would enable machine-to-machine communications. Both technologies are capital guzzlers with billions needed to be invested into buying spectrum and creating the network infrastructure.
Finance minister Nirmala Sitharaman, in her Union Budget speech this year, announced that spectrum auctions to roll out 5G services will be held in 2022-23. While auction prices can break the bank for telcos, the Telecom Regulatory Authority of India (Trai) is reportedly considering lowering the reserve price for 5G spectrum auctions by half. In 2018, Trai had recommended a reserve price of ₹492 crore per MHz for spectrum.
Whatever the price, can VIL ensure greater network investments in the future?
BofA’s managing director, APAC, telcos, Sachin Salgaonkar stated in a research note that VIL is an under-invested network as compared to Bharti or Jio so it would require meaningful investments to fix issues. “It still continues to lose subscribers every quarter. Furthermore, VIL would need more cash to acquire 5G spectrum in their core circles," he noted.
The big plan
To stay in the game, VIL will be working on a combination of equity conversion, tariff hikes, transition of 2G customers to 4G (which will increase ARPU), and enhance digital services—stuff such as music, gaming and content.
While VIL’s ARPU in the December quarter rose to ₹115 from ₹109 in the September quarter, analysts said this need to rise to ₹250 over the next three to four years for it to sustain the leverage—the most critical factor for its long-term viability. Airtel’s ARPU was at ₹163 in the December quarter while Jio’s came in at ₹151.6.
“Not just VIL, all industry players are talking about the need to increase ARPU to about ₹200 in the short-term and to ₹250-300 over the longer-term. This would come from a combination of future price increases, more 4G customers and through enhanced digital services," a VIL spokesperson said.
All telecos pushed through tariff hikes—an average of 20%—in November last year. One more round of hikes is expected in 2022-23. That could improve key metrics, including profitability and the ARPU. The big question now: can telcos squeeze the customer even further?
Indian subscribers have been paying the lowest monthly bills since the advent of Reliance Jio. With average monthly bills costing less than a meal for two in a Delhi restaurant, there is headroom for tariffs to rise, analysts felt. However, any drastic increase can lead to customer attrition. They may even reduce one of the SIMs they currently own—the subscriber base of the telecom industry fell in December after all the carriers raised tariffs the month before.
Meanwhile, VIL is trying out new monetization avenues. Last week, it launched Vi Games, a dedicated games store in its mobile app, in partnership with gaming firm Nazara Technologies. The store offers free and paid games on a subscription model, ranging between ₹26 for three days and ₹56 for a month.
Finally, many market watchers sense VIL would need another lifeline from the government. Analysts at Citi Research stated that if the bank guarantees, still lying with the government, are returned, it could then be replaced by funded and non-funded facilities with banks. The government, according to some reports, is considering releasing bank guarantees worth ₹15,000 crore to VIL, given against AGR and dues related to spectrum bought in previous auctions.
These signals hold out hope of a turnaround in 2022.
