Vodafone Idea’s journey to the brink and back?

A few years ago when ?Vodafone Idea’s ?woes were just about exploding, you would find it hard to believe that the telecom joint venture between Vodafone and Aditya Birla Group would still be around today. There was a flurry of its subscribers making a beeline to port their mobile numbers to either?Bharti Airtel?or?Reliance Industries’ arm Jio. The cash-strapped telco was almost on the brink before a lifejacket was thrown towards it by the Centre in the form of a rescue package for the entire telecom industry. This included conversion of statutory dues into equity like license fees and spectrum usage charges (including dues on annual gross revenues or AGR), and any interest on such dues.?

After #VodafoneIdea (also known by its brand name Vi) took this lifeline, many of its subscribers and some investors might have hoped that it would rise like the phoenix from the cinders. But truth is stranger than fiction. Vi still remains the weakest link among the telecom players, and India’s third largest telecom operator is stuck in a vicious cycle of challenges. The telco is burdened with a massive net debt of over Rs 2.2 lakh crore, with majority of these dues owed to the Centre. It is classified as debt, because a lot of it is just deferred dues.

The Centre’s interest in the survival of Vi goes beyond just recouping its dues, as Vi’s failure could result in a duopoly and also create operational challenges for existing players who would have to service over 20 crore more subscribers.

Still, even though #KumarMangalamBirla is back on the board of Vi, there are still worries about the firm’s ability to launch 5G services. It recently converted some operational dues to telecom tower company ATC worth Rs 1,600 crore into optionally convertible debentures. These debentures can be converted into Vodafone Idea’s shares.

The faith, even though incidental, shown by ATC in the value of these convertible bonds in itself encapsulates the story of Vi, its shareholders and subscribers, creditors , and even the Centre. The Centre owns one-third of Vi, but still that couldn’t budge the market value of the fledgling telco. Unless the firm can raise funds quickly, it won’t be able to launch 5G at scale.

That’s just the start of its troubles at the moment.

Woes galore

Bharti Airtel?and?Reliance Industries’ arm #Jio are making every possible effort to win over Vi’s subscribers with their unlimited 5G data plan and new postpaid offerings. On the other hand, Vodafone Idea has not yet launched its 5G services, despite acquiring spectrum in the auction that concluded in August 2022.

Initially, the Centre also dithered to convert its interest claims on the unpaid statutory dues. Although Vi’s other statutory dues like license fees and spectrum usage charges are under moratorium till October 2024 , it still needs equity infusion. Both its promoters #Vodafone and the #AdityaBirlaGroup aren’t in a hurry to infuse funds. Although Kumar Mangalam Birla is back on the board of Vi, the light at the end of the tunnel is still at a distance.?

Reports?suggest that Birla may have come back on the board at the suggestion of its lenders, who are in the process of figuring out a way to lend more to the telco. But there is still a matter of equity infusion.

A foundering ship

Vi’s struggle did not start overnight but it was the consequences of a chain of events that crushed the entire telecom industry gradually. The root cause of the problem can be traced back to 2016, when Jio’s entry to the market resulted in cut throat competition. With unlimited free calls and ridiculously low data prices, Jio’s offering induced a tariff war and forced other players to cut prices to retain their market share. During that time, telcos used to generate a significant portion of their revenues from voice calls running on 2G networks. Just a year earlier, they had invested heavily in renewing their 2G spectrum, which was due to expire in 2015.

However, Jio's price war resulted in high subscriber churn, while also putting pressure on the ARPU (Average Revenue Per User) of existing telcos. The erstwhile Idea and Vodafone were particularly hit the most because of their large prepaid customer base from small towns , who were highly price-sensitive, an easy target for Jio. On the other hand, #Airtel had an advantage due to its dominance in the sticky postpaid subscriber segment, who were largely from big cities and less likely to switch operators based on pricing.

To combat the rising dominance of #RelianceJio, Vodafone India and Idea Cellular, merged their businesses to create India's largest telecom network - Vodafone Idea with 422 million subscribers and close to 38% market share (as of November 2018). However, the merger also brought in a massive amount of debt worth Rs 1,12,500 crore, 79% of which was payable to the Centre for spectrum charges. Despite the merger, Vi was bleeding subscribers and the ARPU started falling.

The AGR ruling strikes

Things took a turn for the worse when an old case related to a dispute on how to calculate license fees and spectrum usage charges was finally ruled on by the Supreme Court (SC). The SC ruled in favor of the Centre, which led to telcos scrambling to pay their outstanding dues, including interest and penalties. Vi was the worst off among the three private players left in the Indian telecom space when it came to the dues on the revised dues on AGR.

Despite many petitions and requests, the SC did not provide any relief on the dues while it also modified the payment plan, further increasing the outstanding amount than what was proposed by the Centre. Surprisingly, only 25% of the amount represents the actual license fee calculated under the Centre's definition of #AGR, while the remaining 75% of the liability imposed is on account of penalty, interest, and interest on penalty, as directed by the SC. The verdict on AGR dues resulted in a massive liability ?of Rs 1.52 lakh crore, with Vodafone Idea and Bharti Airtel bearing the brunt of it. Vodafone Idea was majorly affected, with a liability of Rs 58,254 crore, leading to a net loss of Rs 73,878 crore for fiscal 2020 - the highest ever recorded by an Indian firm. Its net worth also turned negative.

At this point, both the promoter groups were dithering on infusing more funds into Vodafone Idea. In Nov 2019, Vodafone PLC, one of the promoter entities in Vi, wrote off the book value of the Indian business and decided to put no further money into it.?In a letter?to the Cabinet Secretary in June 2021, Kumar Manglam Birla even expressed his willingness to surrender his group’s stake to the Centre to help keep the company operational.

Once it was revealed that this offer was made to the Centre, the Vi’s share price fell below its face value of Rs 10.

The “Non Vi” rescue package

The Centre’s interest in keeping Vi afloat is as intense as telco's own and thus its intervention was inevitable. Its first move was to appeal to the Supreme Court to allow telecom companies to pay the AGR liability over a staggered period of 20 years. While the SC didn't accept this proposal completely, it agreed to a 10-year payment period. This alleviated the financial struggle of Airtel but was not enough for Vi, which was already experiencing significant losses. Then in September 2021 revival measures aimed at supporting the telecom industry or more precisely Vi, were announced.?

As part of the rescue plan, telecom companies were granted a 4-year moratorium period to pay off their statutory dues, with the option to convert interest dues to equity. While Airtel chose only the moratorium, Vodafone Idea opted for both.

Additionally, the Centre revised the AGR definition, which had caused the need for the rescue package in the first place. The AGR definition was rationalized to exclude non-telecom revenues going forward. ?But this was not the need of the hour as Jio had already restructured its business to avoid including non-core revenues. Airtel aborted its attempt at a similar restructuring after the definition of AGR was changed.

Centre also allowed 100% FDI in telecom companies without prior approval, which was a direct invitation to potential investors of Vi. But unfortunately, no investors have shown interest till date. ?

Vi still needed to generate enough funds from its operations, and investors probably wanted some clarity on how the regulatory dues. So many ifs and buts stalled the process of rescuing Vi.?

Cash Flow Mismatch

Although the Centre has extended a financial lifeline to Vi in the form of a rescue package and equity conversion of dues, the telco’s enormous net debt of Rs 2.2 lakh crore (as of Q3FY23) makes its chances of survival questionable.

Vi’s situation is set to worsen with the end of the four-year moratorium in October 2025. ?According to a?report?by Motilal Oswal, the company will have to pay a staggering sum of over Rs 43,000 crore annually from October 2025, which is more than 120% of its current market capitalisation, and around 250% of its trailing-twelve month EBITDA.

In addition, the company’s outstanding dues to vendors, such as ATC, Nokia, Indus Towers, are also a major concern. Vi owes Indus around Rs 7,000 crore, and the tower company has clearly stated that it will not accept the same payment plan as rival ATC.?

Paying off all of its liabilities, including to Indus Towers, and the recurring opex seems like a tough task. According to Crisil, Vi can generate cash and cash equivalents of ?Rs?6,500-7,000 crore?over the medium term, while it had Rs 726 crore cash on its books as of December 31, 2022l.?

Moreover, Indus’s financial stability is directly correlated with Vi’s health, as the telco accounts for over 40% of the tower company' revenue. In an?interview, Sunil Bharti Mittal said?“Indus Towers, in which Airtel owns a significant stake, like any other company, will eventually have no choice but to seek legal recourse unless Vodafone Idea starts clearing dues”

5G : The Ultimate hope

Despite acquiring 5G spectrum worth Rs 18,800 crore last year, Vi lacks funds to invest in infrastructure and launch its 5G offerings to the market.

This again puts Vi's 21 million loyal postpaid subscribers at risk, who make up over a quarter of the company's revenue and are likely to be key drivers of 5G adoption in the country. ?Moreover, the government has set minimum 5G rollout obligations, and failure to meet them could lead to heavy penalties or even loss of spectrum.

According to a report, the company will need to invest $6 billion-$8 billion in 5G and infrastructure upgrades to remain competitive. ?With all eyes on the company's promoters to source funds, hope may be the only option for Vi's future, at least for the time being.