Stars aligned for Vi? Rs 18K cr FPO has raised hopes of a daring turnaround

But tariff hikes are needed and dues need to be paid

When Vodafone Idea (Vi) Chief Executive Officer Akshaya Moondra thanked customers last week for being “an integral part of the company’s story”, the telecom world took notice. Moondra’s letter to Vi users was a message that the telco was ready for a new chapter of growth, complete with 4G network expansion and 5G rollout. The letter made sure to include the company’s recently concluded Rs 18,000 crore follow-on public offer (FPO) and the trust of the investors in brand Vi.

Around the same time that Moondra’s letter went out, signalling good tidings, brokerage reports captured a similar sentiment of things looking up for Vi.

“The stars are finally aligning for Vi following completion of its long delayed equity raise,” said Citi Research. While hoping that the equity raise would help Vi to narrow the gap with peers Reliance Jio and Bharti Airtel on 4G coverage and 5G rollout, Citi struck a cautionary note, pointing out that a lot needed to be done still. Topping the list -- no points for guessing that -- is tariff hikes. Multiple tariff hikes, actually.                          

Indeed, there are question marks on the impact of the equity raise alone. What are the tariff hikes that the company must roll out to ensure a robust user base and future? Will the first step of equity raise lead to the promoters — Aditya Birla Group and UK-headquartered Vodafone plc — opening their purse-strings? What is the strategy of the Union government, which picked up the largest shareholding in Vi last year after converting some of the pending dues of the telco?     

  

There could be some visibility on Vi’s tariff hike plans once the company’s top management gets into the post-earnings call with analysts later this week. And the benchmark numbers — ranging from monthly ARPU (average revenue per user) to subscriber number additions -- will get sliced and diced after it announces fourth quarter results for 2023-24 on Thursday.

Debt and dues

The upcoming commentary will explain further why Vi's Rs 18,000 crore FPO being oversubscribed had led to a flurry of optimism last month for the financially beleaguered telco, which once had a commanding position. Ever since the FPO, the narrative has been one of a daring turnaround.

For a telecom operator that has been in the news for losing subscribers and market share for more than two years straight, the development generated a rare positive build-up.

But, as the spotlight shifts and the stock price settles down, Vi is now expected to prove its mettle quickly by arresting subscriber loss, repaying its dues to Indus Towers, and convincing banks to lend it about Rs 25,000 crore worth of debt funding.

Most importantly, given the churn and competition of India's telecom industry, Vi will need to ensure that it has enough time to see all this done, and have a chance to rival Jio and Airtel.

Industry sources told Business Standard last month that it could be difficult for Vi to repay bank loans due to other liabilities. Among the most talked about is the money owed to mobile tower management firm Indus Towers. Though the official figures have not been given out by Indus or Vi, Citi Research has estimated Vi's total current dues to Indus at Rs 5,700 crore while Ambit Capital last month pegged it around Rs 10,000 crore.

In March, Vi shareholders approved a plan to raise funds worth Rs 45,000 crore, through both equity and debt. While talks with banks have begun in earnest, commercial banks have hinted they will first look into the telco’s liabilities and repayment schedule over the next four to five years before deciding on extending loans.

Indus Towers has said it expects the dues to be cleared soon, especially since Vi begins its 4G expansion and 5G rollout in its 17 priority circles.

However, the much bigger chunk of Vi's dues are owed to the government. The company has to pay Rs 12,000 crore to the government between October 2025 and March 2026, taking into account both principal and interest. Subsequently, it needs to pay Rs 43,000 crore annually for five years.

Sources close to the company say Vi intends to clear all the vendor dues within 12 to 18 months from operational cash flows.

Govt to the rescue again?

Earlier this year, Moondra had said the telco might have the option to further convert dues owed to the government into equity. The telecom reforms package of 2021 had allowed Vi to convert the interest on moratorium principal into equity. A decision on whether to convert the moratorium principal into equity will be taken when the four-year payment moratorium ends in September 2025.

Though the telco firmly believes this can be done, it also knows reaching a consensus on this may be more difficult given that it may lead to a significant dilution of stakes held by the existing shareholders, a senior Vi official had told this newspaper last month.

After the last conversion of debt in February 2023, the government became the biggest shareholder, with a 33.1 per cent stake. Promoters Aditya Birla group and Vodafone held 18.1 per cent and 32.3 per cent, respectively. After the FPO, the promoter shareholding has come down to about 38 per cent and government shareholding to 24 per cent, with the remaining 38 per cent held by the public.

Further conversion of debt may be required, given the size of its debt at Rs 2.15 trillion as of December 2023.

5G soon

What may have given confidence to the subscribers and investors is Vi’s latest stand that it would use the funds raised from the FPO to upgrade its network infrastructure. In his recent letter to Vi customers, the CEO has promised 5G rollout in the company’s 17 priority circles.

While it has not clarified the exact capital expenditure target, Vi executives said in a meeting with analysts last week the process would complete within six to eight quarters, while overall capex will be spread over the next three years.

The company plans to be 5G-ready by FY26. In comparison, Jio has already gained 108 million 5G users, as of FY24-end, while Bharti Airtel is estimated to have  more than 75 million 5G users.

Another worry is that Vi's ARPU remained the lowest in the industry, at Rs 145, at the end of Q3 (October-December) of FY24, trailing behind Bharti Airtel's Rs 209 and Reliance Jio's Rs 181.7.