Vodafone Idea would have been forced into administration if asked to clear dues immediately
For cash flow break-even in FY23, Voda Idea’s average revenue per user needs to more than double, according to analysts
The government has done its bit to save Vodafone Idea Ltd. It pleaded with and convinced the Supreme Court to allow a deferral of the payment of adjusted gross revenue (AGR) dues of telcos. If telcos were forced to clear their AGR dues immediately, Vodafone Idea would have been forced into administration.
The court eventually agreed to a 10-year payment term, and investors have concluded that this gives Vodafone Idea a fresh lease of life. Its shares have risen 36% since the court’s verdict was announced. And with clarity about the AGR dues, the company has said it will tap the markets to raise ₹25,000 crore through simultaneous equity and debt issuances.
So far, so good. But saving Vodafone Idea is still very much a work-in-progress, and the heavy-lifting will now need to be done by its humble subscribers. The $3.4 billion fundraise, if successful, will merely help address the cash flow needs till the next fiscal. Note that the ₹25,000 crore it raised through a rights issue last year is already exhausted.
For cash flow break-even in FY23, Voda Idea’s average revenue per user needs to more than double, according to analysts at Kotak Institutional Equities.
“The company needs a combination of (a) quick, sharp improvement in pricing, (b) flawless delivery on fresh cost-cutting targets, (c) competitive network spends to stem the trend of market share erosion and (d) some equity infusion. Odds of Vodafone Idea’s survival without a meaningful price hike are bleak. In our view, equity infusion will demand price hikes as well," they wrote in a 1 September note to clients.
In short, multiple things need to fall in place for the company to survive, although what’s most critical is pricing, which needs to more than double.
Since the government reportedly had a role to play in the synchronized price hikes by telcos last December, a view that is commonly held is that it should take similar steps to ensure higher tariffs and, in turn, Vodafone Idea’s viability. After all, it has the most to lose if the company goes bust, with dues of about ₹1.5 trillion in terms of present value.
“It is the government that faces the maximum write-off if Voda Idea were to go down. To dilly-dally on the floor tariff regulation or lose sight of the big picture, in this backdrop, would tantamount to the government letting a situation evolve where massive value gets transferred from the government (as well as the company’s shareholders and other creditors) to competitors Reliance Jio and Bharti Airtel," Kotak’s analysts said in the note.
Jio is known to be reluctant to raise tariffs as it interferes with its aggressive strategy of pursuing market share. If the government weighs in and puts in place a floor tariff regulation, Vodafone Idea would have a better chance of survival. This might ensure that the government does not transfer value to Jio and Airtel, but it also means that the tab for this is picked up by subscribers.
This takes us back to the flawed auction process of the government for spectrum, where companies ended up bidding unreasonably high amounts and are now left with unsustainable debt. While Jio’s entry in 2016 resulted in a drop in tariffs, subscribers may soon be staring at tariffs that are even higher than pre-Jio levels.
Kotak’s analysts said Vodafone Idea’s Arpu needs to rise to ₹245 for it to achieve a cash-flow break-even in FY23. In mid-2016, before Jio’s launch, the former Idea Cellular’s Arpu stood at around ₹175. One may argue that customers now get unlimited voice and lots more data, but the fact also remains that costs have risen for users at the bottom of the pyramid, with companies now resorting to minimum recharges.
The irony, as far as Vodafone Idea’s future goes, is that tariff hikes will strengthen its competitors’ position. Their balance sheets are leaner, and tariff hikes will make them more cash-rich. This can result in increased network spends and better offerings for subscribers. Vodafone, which is already losing market share at a fast clip, may struggle to keep pace.
“Jio and Airtel already have far better networks and are investing greater amounts," said Nitin Soni, senior director, Fitch Ratings. Relatively lower investments in its network have resulted in a drop in revenue market share from 41% in FY17 to 21% in the June 2020 quarter, data compiled by Jefferies India Pvt. Ltd showed.
“The SC order isn’t so much a fresh lease of life, as it is a prolonging of Vodafone Idea’s misery," said an analyst at a domestic institutional brokerage, requesting anonymity.
But even if the court had demanded an upfront payment of the entire AGR that was due, and ended the company’s misery, that would be no major reprieve for subscribers. The ensuing duopoly would have meant an eventual sharp rise in tariffs in any case.
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