Vodafone Idea Lifeline Delays Imminent Telecom Duopoly In India

The Union government's Rs 16,000-crore lifeline to Vodafone Idea Ltd. is, at best, a band-aid on a much-deeper gash.

The government has agreed to convert into equity the interest accrued on Vodafone Idea's dues, a move seen as a nudge to the beleaguered telecom operator to come up with a fundraising plan.

The joint venture of Aditya Birla Group and U.K.'s Vodafone Group Plc has been directed to issue to the government 16.13 billion equity shares of face value Rs 10 each at an issue price of Rs 10 apiece, according to an exchange filing on Friday.

That translates to an equity stake of 33.3%, worth more than Rs 16,100 crore, and makes the government the biggest shareholder in the debt-laden telecom operator.

"We had sought a firm commitment that the Aditya Birla Group would run the company and bring necessary investments. The Birlas have agreed and, hence, we've agreed to convert," Telecom Minister Ashwini Vaishnaw said in a statement on Friday. "We want India to be a three-player market, plus BSNL, and ensure healthy competition for consumers."

That's easier said than done.

White Knight

The prospect of a white knight at Vodafone Idea stands reduced as the government now has a seat at the table, according to an industry executive, who spoke on the condition of anonymity.

No one wants to work with the government, especially when it's the biggest stakeholder, the person quoted above said.

Unless the government keeps an arm's length from Vodafone Idea's affairs, a third party would not be interested in equity infusion, according to the executive.

Queries emailed to Vi remained unanswered at the time of publishing this story.

The lifeline lends optionality to Vodafone Idea, but that, too, is a short-term fix. While the government stake allows the beleaguered telecom firm to approach banks for additional funding to repay vendor dues, it isn't nearly enough to service debt and invest in capacity expansion.

Lenders estimate that the telecom operator needs Rs 40,000–50,000 crore to remain a going concern, BQ Prime reported on Jan. 6, citing two people aware of the matter. Assuming a 3:1 debt-to-equity ratio, Vodafone Idea promoters would need to bring in at least Rs 10,000–12,000 crore worth of equity capital, they said.

That, too, may not be enough, the industry executive cited earlier said. What Vodafone Idea needs is at least Rs 25,000 crore in senior structured debt to stay afloat, he said.

Subscriber Churn

A delay in the government's debt-to-equity conversion—the relief was announced in September 2021—has saddled Vodafone Idea with additional operational creditor dues amid a subscriber churn.

The company has lost 25 million subscribers since October 2021, but retained 21 million of its postpaid subscriber base, CLSA said in a Feb. 5 research report.

Vodafone Idea is staring at a further erosion in the market share, as rivals Bharti Airtel Ltd. and Reliance Jio Infocomm Ltd. are stepping up 5G operations while it's lagging in even the 4G capex spending. There has been uncertainty over Vodafone Idea's 5G rollout due to the delay in the planned fundraising.

Debt Obligations

According to JPMorgan, Vodafone Idea has to repay banks Rs 9,600 crore by September 2023 as well as Rs 10,000 crore in vendor dues.

As on Sept. 30, 2022, the telecom firm was saddled with a total debt of Rs 2.2 lakh crore, comprising Rs 1.36 lakh crore in deferred spectrum payments, and Rs 68,590 crore of liabilities in adjusted gross revenue. The telecom firm owes banks Rs 15,080 crore. The company had opted in October 2021 for a four-year moratorium on payment of spectrum and AGR dues.

CLSA said that even after the government conversion of interest to equity and fundraising, Vodafone Idea would struggle to fund annual spectrum payments of Rs 35,000 crore beyond the moratorium, unless the average revenue per user reaches Rs 270-300.

That figure stood at Rs 149, as on Sept. 30, 2022.

Bull-Case Scenario

Still, Morgan Stanley sees no imminent consolidation in India's telecom space.

"The currency newsflow…is in line with reforms and the support package for the telecom sector communicated by the government earlier," the U.S.-based investment manager said in a Feb. 6 research report.

"This event (government lifeline to Vodafone Idea) finally happening would alleviate investor concerns and reinforce the alignment of regulation and competition in the industry."

Bharti Airtel stands to benefit in such a scenario, Morgan Stanley said, as 4G tariff hikes get delayed and 5G rollout accelerates market share gains.