Cash-strapped Vodafone Idea requires moratorium on interest to stay afloat

Company spent Rs 5,200 crore on interest payment in Q1, equal to 57% net sales

Vodafone Idea (Vi) will require a complete moratorium on debt and interest payments and simply deferring AGR (adjusted gross revenue) and spectrum dues, the biggest cost head for the firm, is unlikely to help it effect a turnaround.

The company spent nearly Rs 5,200 crore on interest payment in the first quarter of financial year 2021-22 (Q1FY22), which amounts to 57 per cent of its net sales. In FY21, Vi’s outgo on interest payments was nearly Rs 18,000 crore, or about 43 per cent of its net sales.

According to the terms of the telecom package announced last week by the Centre, operators including Vi will not have to pay spectrum or AGR dues for four years. However, firms that opt for this moratorium will have to pay annual interest of MCLR+2 per cent. The government has also given them an option to pay the interest arising from self-deferment by way of equity.

Given this, the moratorium may actually push up Vi’s interest burden and the company may continue to post losses and bleed cash.

The deferred payment on spectrum and AGR dues will get added to Vi’s outstanding liability and it may end with a much higher debt burden after the four-year period.

Not surprisingly, analysts are skeptical about the benefits for Vi. “We do not think the measures are adequate to address Vi’s problems. We believe a multi-pronged approach that reduces the net present value of Vi’s liabilities through lower interest, spectrum surrender, higher cash flows through higher tariffs, lower licence fee or spectrum usage charge and resolution of liquidity issues through moratorium and fundraise is needed to turn around Vi,” said Kunal Vora of BNP Paribas Securities India in a note.

He says Vi is facing the dual issue of rising debt and declining market share, which is expected to continue. 

“With a large and increasing debt, we believe raising funds will still be difficult,” he adds.

The interest burden on Vi is nearly three-times greater than on Bharti Airtel and nearly 7X that on Reliance Jio. In other words, while Vi spent Rs 43 out of every Rs 100 it earned from subscribers on interest payment. The ratio was only Rs 15 and Rs 5.6 for Airtel and Jio respectively in FY21.

Vi reported gross debt of Rs 1.98 trillion at the end of March, up nearly 38 per cent from Rs 1.44 trillion a year ago, including spectrum and AGR dues. Its gross debt has more than tripled in the last three years from Rs 61,660 crore in FY18.

Meanwhile, its revenues have failed to keep pace with the growth in liabilities, rising just 48 per cent between FY18 and FY21. What’s worse, Vi’s net sales have been declining for the last 10 quarters.

Analysts say such a high interest burden makes it nearly impossible for the company to invest in network upgradation or customer acquisition and sales and marketing. 

This has pushed Vi into a vicious cycle of decline in subscriber numbers, lower revenues and profits and ever growing debt and interest burden.

“With a series of upcoming debt repayments over the next 6–9 months, exhausting cash balances and no timelines for the announced fundraise, it could prove to be challenging for Vi to manage operations,” write analysts at Motilal Oswal Securities.