Vodafone Idea getting its act together to stay in the game

After getting a reprieve from the Supreme Court on AGR payments, Vodafone Idea is putting in place a multi-pronged strategy to stay relevant in a highly competitive telecom market. This includes raising funds, selling non-core assets, and tightening the business operations by paring costs and improving revenue earned per subscriber.

“Everyone is writing us off but we are still in the game. The Supreme Court ruling gives us certainty and closure on the AGR issue. Now we know what we have to pay and in how many years, so we can plan ahead,” said a top Vodafone Idea executive.

According to another executive, the operator has received interest from multiple investors because the AGR ruling gives clarity. “There is interest from investors. This is still a very good company, with top quality subscribers and assets. It is now all about valuation,” the executive said, adding that additional equity by existing promoters of the company cannot be ruled out.

“While Aditya Birla Group leadership had earlier indicated that it won’t pump in good money behind bad money, the 10-year time period given by the court changes everything. The mood has shifted from despair some months back to one of looking ahead,” said one of the old-timers at Vodafone.

Board meeting on Sept 4

To start with, Vodafone Idea will hold a board meeting on September 4 to consider raising fresh funds. While the company did not disclose how much money it plans to raise or through what mechanism, analysts believe that the operator will need massive investments to keep up with the likes of Reliance Jio.

“Massive dilution would need to occur to de-gear Vodafone Idea but would allow the owners to stabilise a business that has lost a third of its subscribers in the seven quarters since merging. A substantial recap would create a more solid competitor — with the balance sheet to be profitable. We believe that at least a ₹70,000-crore recap is needed to reduce gearing to a manageable level, which is triple VIL’s current market cap,” said analysts at Deutsche Bank Research.

Company insiders, however, said the investment requirement at this point may not be more than ₹30-40,000 crore. Of this, half could come from selling the company’s fibre and tower assets. The balance will come through the fresh fund-raising exercise being undertaken by the company.

Analysts, however, said that even with a 10-year staggered payment for AGR dues, the operator’s survival is in question. “Our analysis shows that despite ARPU recovery to ₹170 (up 49 per cent from June 2020 levels) and being able to stem the loss of subscribers to 270 million by FY23E (vs 280 million as of June-20), cash balance for VIL would be in a precarious situation by end FY22E. Further, resumption of ₹15,700 crore of deferred spectrum payments from FY23E would accentuate the cash flow strain for VIL,” said a report by Credit Suisse.

Cash burn

Emkay Global Financial Services said that VIL should see a cash burn of ₹21,900 crore over FY21-23E, while Bharti Airtel would register a cash generation of ₹37,300 crore over the same period.

“In our view, even after a tariff hike, an equity infusion by promoters or a strategic investor, along with any potential surrender of unused spectrum to reduce future liability, seems to be the only solution to ensure VIL’s survival. It could be challenging for VIL to obtain strategic investor due to continued market share erosion and sustained cash losses. We see serious survival issues for VIL even if it gets an equity infusion to offset the cash burn over FY21-23E, as for FY24, VIL will have an annual cash requirement of more than ₹32,000 crore towards government dues and capex funding,” it said.