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‘Government won’t interfere in running of Vodafone Idea’

Goldman estimates Vodafone Idea’s free cash flow to have an annual shortfall of more than $3 billion, starting FY27, when spectrum payments resume. (AFP)Premium
Goldman estimates Vodafone Idea’s free cash flow to have an annual shortfall of more than $3 billion, starting FY27, when spectrum payments resume. (AFP)

  • Investors waded back into the beaten-up stock after the clarification on Wednesday
  • The shares surged as much as 12.7% before ending trading at 12.80 on BSE, an increase of 8.47%. The stock plunged 20.5% on Tuesday

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Vodafone Idea Ltd’s chief executive Ravinder Takkar clarified on Wednesday that the government has no intention of running the business or taking a board seat despite being the company’s largest shareholder.

The debt-laden telco, Takkar said, decided to convert interest on dues into equity upfront to reduce interest outgo and is on track to raise funds to strengthen its balance sheet. On Tuesday, the company opted to convert interest on deferment of adjusted gross revenue (AGR) and spectrum instalments dues of about 16,000 crore into equity.

Investors waded back into the beaten-up stock after the clarification on Wednesday. The shares surged as much as 12.7% before ending trading at 12.80 on BSE, an increase of 8.47%. The stock plunged 20.5% on Tuesday.

“The government is very clear, they want us to run the company, and that is what we intend to do as well," Takkar told reporters. “They want three private players in the market. They certainly do not want a duopoly or a monopoly."

After the conversion, the government will own 35.8% of Vodafone Idea, while Vodafone Group’s stake will drop to 28.5% from 44.39%, and Aditya Birla Group’s ownership will be diluted to 17.8% from 27.66%.

Takkar said the company is in discussions with several investors for raising funds. “I can confirm again, very strongly, that there is a huge interest, especially from international investors, in investing in India. They’re interested not only in India, but they also are interested in the telecom sector, and we’ve had interactions with several of them," he said, adding that the company may soon announce its fundraising plans.

The key concerns of investors on whether India will remain a three-player telecom market, whether the government will come out with reforms in the sector and whether it will provide financial aid have been addressed by the structural reform package announced by the government in September, he said.

He added that the conversion process would take a few months. Post the approval, shares will be issued to the government and will have to be approved by shareholders.

The company will issue shares to the government at 10 as the average price of the shares on 14 August, the record date decided by the telecom department to calculate the value of the company, was below its par value, Vodafone Idea said on Tuesday.

Since 14 August was a Saturday, assuming the share price of Friday, 13 August is taken—which was 6.32—analysts said the government could well demand a higher stake after final consultations. Takkar said the net present value of 16,000 crore of dues could also change based on the discussions with DoT since the company had given its calculations to the department and a final amount will be confirmed post the discussions.

“In our view, the government may end up increasing its stake in Vodafone Idea further, as and when the cumulative deferred amount of 92,000 crore pertaining to AGR dues and spectrum liabilities becomes payable post the end of the moratorium period," said analysts at Kotak Institutional Equities.

Analysts at Kotak said it was unlikely Vodafone Idea would be able to service deferred liabilities in about four years as it continues to lose subscribers and falls short on investments needed to upgrade the network to keep up with the competition.

“Until there is further clarity on the final stake of the government in the company, Vodafone Idea could find it difficult to raise external capital given such shareholders may face the risk of additional dilution," said analysts at Goldman Sachs in a note dated 12 January.

They cautioned that the erosion in market share in such a scenario, with capex lagging peers, can further accelerate if the company fails to increase free-cash-flow meaningfully in the near term to make investments in buying 5G spectrum and capital expenditure.

Goldman estimates Vodafone Idea’s free cash flow to have an annual shortfall of more than $3 billion, starting FY27, when spectrum payments resume. This could result in further equity dilution as the government can convert AGR and spectrum principal amount into equity at that point.

Takkar said the company had chosen the on-time option to convert the interest on dues into equity upfront as it was the best option to reduce the debt burden and de-leverage more since most of the debt is owed to the government.

“The company has a significant amount of debt, we have a stretched balance sheet, and anytime there’s an option to convert that debt to equity is considered positive for the company, especially considering that most of the debt is to the government of India," he said, backing the decision.

Meanwhile, on Wednesday, the last date to opt for interest conversion, Tata Teleservices Ltd wrote to the telecom department for converting interest on AGR dues of about 4,139 crore to equity, people aware of the development said. The equity holding in the unlisted entity will be based on the net present value, which will be decided based on mutual agreement, the company told the telecom department, the people said.

The NPV formula adopted by DoT for listed firms won’t apply to TTSL.

TTSL did not respond to email queries till the time of going to press.

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