Voda-Idea gets olive branch but is still not out of the woods

Vi also needs to manage free cash flow of over $4 bn a year from FY27 when moratorium on spectrum and AGR dues ends

Gulveen Aulakh
Updated7 Feb 2023
The carrier will need an investment of $6 billion-$8 billion in 5G, fibre and other infrastructure to stay competitive.
The carrier will need an investment of $6 billion-$8 billion in 5G, fibre and other infrastructure to stay competitive.

New Delhi : The government’s acquisition of a 32% stake in Vodafone Idea, making it the largest shareholder in the country’s third-largest carrier, has alleviated bankruptcy concerns and received investor approval, as was reflected in the 20% surge in the company’s stock on Monday.

The government lifeline also allows the telco to raise funding, refinance bank debt, which would be used for paying up its dues to tower providers Indus Towers and American Tower Corp., and invest in 5G to compete with rivals Bharti Airtel and Reliance Jio.

Indicating changes are underway already, Vodafone Idea on Monday said it had partnered with Motorola to ensure the smartphone maker’s devices work on Vodafone Idea’s 5G network in Delhi, hinting at a possible 5G launch in the national capital.

“We believe this should provide a lifeline to IDEA as it should now be able to raise funds that will be critical for debt and vendor payments and also to invest in 4G and 5G capex,” said analysts at JP Morgan in a note.

However, the carrier will need an investment of $6 billion-$8 billion—more than double that it has been seeking to raise from investors—in 5G, fibre and other infrastructure to stay competitive, analysts noted, which will continue to be a cause for concern amid still-elevated debt levels and continuous loss of subscribers and market share erosion.

“While the current government move drastically reduces any risks of VIL going into NCLT (National Company Law Tribunal), we think fundamental issues on VIL remain. Our checks and discussions with vendors/tower cos indicate that VIL is significantly under-invested in fibre, 5G and core telcos infra. It would at least take $6-8 billion investment to narrow the gap,” said analysts at Bank of America Securities in a note seen by Mint. The carrier also needs to finalize supply contracts for 5G gear, invest in expanding its 4G network, besides paying up dues of more than 15,000 crore to suppliers and Indus Towers and American Tower Corp.

Yet another challenge will be ensuring free cash flow of over $4 billion every year from FY27 when the four-year moratorium on spectrum and adj-usted gross revenue dues of 16,133 crore ends, and payments to government begin.

At the end of the four-year moratorium in FY27, at the government’s discretion, there will also be an option for Vodafone Idea to convert principal dues of debt into equity.

Analysts at Goldman Sachs cautioned that Vodafone Idea could find it difficult to raise capital until there was clarity on whether Centre will exercise this option and thus dilute the stakes of other shareholders. “Given the still elevated debt profile, continued market share erosion (Vodafone Idea has lost 22 mn active subscribers, or c.10% of its base, in the last 12 months), and meaningful network gap vs peers, we see a low probability of Vodafone Idea raising a meaningful amount of external capital,” they said.

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