When Vodafone India Ltd and Idea Cellular Ltd announced the completion of their merger last week, Reliance Jio Infocomm Ltd tweeted, tongue firmly in cheek, “Bringing people together since 2016." While Reliance Jio’s entry helped the two companies decide on a merger about 18 months ago, its continued aggression has meant the merged entity is in a far more precarious position than anyone had envisaged at the time of the merger announcement.
Back then, the two companies had reported a combined Ebitda of ₹ 24,400 crore for the 12 months till December 2016. Profit fell to ₹ 10,700 crore in the 12 months till June 2018, Vodafone Idea Ltd reported last week. Ebitda stands for earnings before interest, tax, depreciation and amortization.
And while Vodafone Idea leads the industry by a huge margin in terms of revenue and subscribers, the picture is quite different when it comes to profitability and leverage ratios. Its trailing 12-month Ebitda, for instance, was 20% lower than that of Bharti Airtel Ltd’s India wireless business, even though its revenues were 33% higher.
Analysts at JM Financial Institutional Securities Ltd estimate that the combined entity’s annualized profit stood at merely ₹ 7,270 crore in the June quarter. Vodafone Idea’s net debt, meanwhile, is about 15 times its profit. At the time of the merger announcement in March 2017, the net debt to Ebitda ratio was at roughly 4.4 times.
Note that net debt itself has remained more or less the same, despite sizeable equity funding at both companies this year. Idea raised ₹ 6,750 crore through a preferential issue to promoters and other institutional investors. Vodafone Group Plc invested ₹ 8,600 crore in its Indian arm.
This simply shows the considerable cash burn at the two firms because of the cut-throat pricing in the industry. JM Financial’s analysts estimate a cash burn of roughly ₹ 4,000 crore each quarter for the merged entity, adding that its cash balance should last about five quarters, assuming there is no recovery in tariffs.
From the looks of it, Reliance Jio is nowhere near being done with its aggression on tariffs. While the company has quickly captured a majority share in the smartphone segment, it has only recently entered the postpaid segment, and it’s yet to make major inroads in the feature-phone segment. Its revenue market share is currently at around 23%, which is about half of its aspiration.
Even if tariffs remain where they are, market share gains by Reliance Jio can erode profitability further at Vodafone Idea. Needless to say, the need of the hour for the merged company is to up the tempo in terms of investments and defend its market share. Subscriber and revenue data in recent months show that it has been losing market share, while Airtel has been fairly successful in defending its share. With the merger hurdle now being crossed, Vodafone Idea has its task cut out. Perhaps, it may even need to raise additional equity, given the continuing cash burn, and the need to invest heavily.
But as pointed out earlier in this column, Vodafone Group seems to be in no mood to invest heavily in the Indian business. Instead, it is selling part of its holding to Idea’s promoters and has already de-consolidated the Indian operations from its books of accounts. It is little wonder analysts and industry observers see the merged company as the most vulnerable telco in the country, despite being the largest.