Vodafone Idea's FPO would be good for lenders, bad for shareholders

One of the objectives of the FPO is to expand network coverage by spending  ₹7,030 crore on 4G and  ₹5,720 crore on 5G.
One of the objectives of the FPO is to expand network coverage by spending 7,030 crore on 4G and 5,720 crore on 5G.

Summary

  • The best-case scenario for the company would see it lose no more subscribers and match the industry's average revenue per user.

Telecom company Vodafone Idea’s 18,000-crore follow-on public offer (FPO), if successful, would be good news for its lenders but not its shareholders. While existing lenders would have improved visibility on repayments, there could be a fresh lending opportunity of 25,000 crore as the company intends to raise new debt using the elbow room provided by the fresh equity.

One of the objectives of the FPO is to expand network coverage by spending 7,030 crore on 4G and 5,720 crore on 5G. An analysis of the capital expenditure (capex) per site reveals that the company’s cost of setting up 4G and 5G is almost identical at 25 lakh.

Even with 5G technology available, the company is still following the strategy of expanding its 4G network. This could be because larger rivals such as Jio and Airtel have so far been unable to monetise their relatively small 5G user base (just over 15% of their total subscribers), and growth in 5G has been muted so far as most compatible handsets are priced above 10,000.

As 5G handsets become more affordable and the technology offers more use cases such as Internet of Things, the company will again have to incur capex on upgrading to the new network. With internal accruals barely enough for annual debt servicing, Vodafone Idea may have to again raise fresh funds through equity or debt to fully migrate to 5G.

The best-case scenario for the company would see it lose no more subscribers and match the industry's average revenue per user (ARPU). Its subscriber base at the end of December 2023 was 215 million, with about 126 million 4G users, yielding an ARPU of 145. By expanding the network, it may be able to halt customer migration and raise the ARPU.

The industry ARPU could climb 25-35% to 250 if there is a tariff hike after the general elections and higher data consumption from 5G. Should it manage to catch-up with the industry ARPU after expanding its network, the company has the potential to achieve an annual topline of 66,000 crore and Ebitda of 33,000 crore with a margin of 50%. The Ebitda figure must viewed in the context of the company’s annual interest burden of 25,000 crore for FY24, based on the data from 9MFY24. This burden means there may be no surplus funds for future growth or to return to shareholders.

The company has to pay 2 trillion in spectrum dues and the government’s share in adjusted gross revenue in the five years from FY27 to FY31, or about 40,000 crore a year. It's likely the company will fail to meet its debt repayments, and the government may convert some of its dues into equity. This would bloat the equity base of the company further after the massive dilution of nearly 35% post the FPO, assuming allotment at 10, the lower end of 10-11 price band.

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