Uncertainty on AGR, spectrum payments weighs on Vodafone Idea: Analysts

Without fundraising, the company may not be able to meet its payment obligations over the next 12 months

Though its March quarter (Q4) results were operationally in line with Street expectations, the Vodafone Idea (Vi) stock slipped over 8.8 per cent given concerns on unsustainable debt levels, lack of clarity on the adjusted gross revenues issue (AGR) and fundraising plans.

While the company ended financial year 2020-21 (FY21) with operating cash flow of over Rs 15,000 crore, it has to do much better if it is to meet its upcoming payment obligations. Though the Street is awaiting the telecom regulator’s view of floor tariffs, Vi may have to initiate a price hike. The decision is likely to be taken after the Supreme Court’s decision on AGR. 

Higher cash flows are important given the ballooning debt of just under Rs 1.8 trillion (over 55 per cent is deferred spectrum liability), payments due over the next year and uncertainty related to much needed fundraising. Vi’s net debt to operating profit stands at 21 times, which analysts at Credit Suisse say is unsustainable. 

While the group has met all its debt obligations so far, SR Batliboi & Associates, the company’s auditors, highlight that there is a material uncertainty related to the group’s ability to continue as a going concern. This is dependent on ability to raise additional funds, lenders’ support, monetising of assets, telecom department’s go ahead for deferment of spectrum payment, and outcome of the AGR issue, they add. 

The liabilities over the next 12 months include AGR dues of Rs 8,000 crore in March 2022, annual spectrum payment of Rs 8,200 crore in April 2022 and expiry of Rs 7,039 crore of bank guarantees — or a total of about Rs 23,000 crore. 

Manish Adukia and Piyush Mubayi of Goldman Sachs say that Vi has large repayments due starting December 2021, and at current Ebitda (earnings before interest, taxes, depreciation, and amortisation) run-rate, the company could have a Rs 23,400 crore ($3.1 billion) cash shortfall until April 2022. 

In fact, the lack of cash flows will impair the company’s ability to spend on capex. It spent 72 per cent less capex than Bharti in FY21 and this is expected to continue in the near term. The company lost 130 basis points (bps) market share in the quarter, taking the cumulative loss to 630 bps over the last year. 

As the company has not had much success in fundraising efforts, a lot will depend on spectrum payment relief from the government and lower AGR payments. 

On the operational front, the company’s performance in Q4 was broadly in line, with a 12 per cent sequential decline in revenues. This was due to lower average revenue per user (ARPU), which slipped by a similar quantum and a marginal dip in subscriber base.

Though subscriber levels were down 0.7 per cent, or 2 million, to just under 270 million, the rate of decline is much lower than in the first two quarters of FY21, when it lost 8-11 million customers a quarter. The 4G subscriber trends also improved with addition of 4.2 million subscribers as compared to 1.5 million to 3.6 million subscribers in June and September quarters. 

The launch of Jio’s affordable smart phone over the next quarter, however, could pose a challenge for Vi’s subscriber base, especially if the pricing is around the Rs 4,000 mark.