Google's interest positive but may not help solve Voda Idea's debt woes

A potential investment by Google into cash-strapped Vodafone Idea (VIL), if materialises, will be a strategic positive for the Indian telecom operator, but a five per cent stake would still be inadequate to solve the telcos' debt problems, analysts said on Friday.

Acquisition of a controlling stake by an outsider or a sizable equity infusion by current promoters remains the need of the hour, Credit Suisse said in its latest note.

Alphabet Inc's Google is said to be eyeing about 5 per cent stake in VIL, the Financial Times had reported on Thursday. Such an investment in VIL will pit the search giant against Facebook which has picked up a stake in Jio Platforms, the firm that houses India's youngest but biggest telecom company - Reliance Jio.

Google investment into VIL can be incrementally positive, but a 5 per cent stake is unlikely to move the needle or provide any meaningful relief to VIL's debt problems, said Credit Suisse.

"We think unless Google (or any other external investor) looks at acquiring a controlling stake in VIL, the chances of company's long term survival beyond FY23 (when the moratorium on deferred spectrum debt ends) appears to be low," it said.

Goldman Sachs said that at Vodafone Idea's current market cap, a 5 per cent stake would be valued at USD 100 million or less than one per cent of the company's USD 14 billion-outstanding net debt as of December 2019.

"However, we believe that any such investment from a global tech company such as Google could potentially make it easier for VIL to raise capital in the future...," it said.

The adjusted gross revenue (AGR) situation still remains uncertain, and could potentially add as much as 50 per cent to Vodafone Idea's existing net debt of USD 14 billion. In such a scenario, the telcos' ability to generate investor interest is unclear, unless there is complete transparency on its regulatory liabilities, it added.

The existing high balance sheet leverage suggests VIL would need at least USD 10 billion of incremental capital for net-debt-to-EBITDA (earnings before interest tax depreciation and amortisation) to fall to a level that is in line with global telco peers, in the coming years, it observed.

A stronger balance sheet could help Vodafone Idea arrest its market share decline in the wireless market, potentially reducing overhang on tower stocks too, the Goldman Sachs note said.

"Currently, there is no proposal as reported by the media that is being considered at the Board," said Vodafone Idea in a statement to exchanges.