'Timely support, will offer relief': Citi on VIL dues to equity conversion

The government's decision to convert Rs 36,950 crore dues of Vodafone Idea (VIL) into equity is a "major" and "timely" display of support that will offer significant cash flow relief to the telco in the next three years and help it complete long-delayed bank debt raise, Citi said on Monday.

The move also lifts concerns on tower companies like Indus Towers. 

"Overall, we view this as a major display of support by the government in a very timely manner, which should provide significant cash flow relief to VIL in the next 3 years and help it complete its bank debt raise," the brokerage said in its latest report.

Throwing a lifeline to the troubled telecom operator, the government has decided to convert Rs 36,950 crore of VIL's outstanding spectrum auction dues into equity, under the provisions of the September 2021 telecom reforms package.

The government shareholding in VIL will correspondingly increase to 48.99 per cent from 22.6 per cent. VIL promoters will, however, continue to have operational control of the company.

Citi termed the "material development" as having significant positive implications for the company.

"The conversion of spectrum dues to equity will bring down VI's overall net debt by nearly 18 per cent. We estimate VI's spectrum dues (for pre-2021 spectrum) that are payable over FY26/27/28E could reduce from Rs110/250/250 billion (Rs 11,000/25,000/25,000 crore) to nearly Rs5/50/150b billion (Rs 500/5,000/15,000 crore), implying over Rs 400 billion (Rs 40,000 crore) of cash flow relief over the next three years...note that annual spectrum payments of about Rs 22 bn (Rs 2,200 crore) for post-2021 spectrum plus annual AGR payments of Rs 165 bn (Rs 16,500 crore) would remain payable," it said.

This should help VI move one step closer to completing its long-delayed debt raise from banks, Citi said.

"Additionally, the ongoing launch of 5G services in select cities (Mumbai already launched) should improve sentiment around the company arresting subscriber losses going forward," it said.

As it is, VIL's balance sheet leverage -- uncomfortably high -- had been a cause of analyst discomfort, a worry that had worsened following the Supreme Court verdict on the AGR issue in Oct 2019.

Relief came by way of multiple moves, including a four-year government moratorium on spectrum and AGR payments (that provided material cash flow relief), while the completion of the long-delayed equity raise ensured sufficient capital for the telco to plough into network and reduce a yawning gap with two larger peers on 4G coverage and 5G rollouts.

On Sunday, VIL informed the stock exchanges that the government has decided to convert Rs 36,950 crore of spectrum dues into equity -- a move that would make the Centre the largest shareholder in the telco, although the promoters -- Vodafone and Aditya Birla Group will continue to hold operational reins (control) of the telco.

"Government has, in line with the September 2021 reforms and support package for telecom sector has decided to convert the outstanding spectrum auction dues, including deferred dues repayable after expiry of the moratorium period, into equity shares to be issued to the Government of India...," VIL said in an exchange filing on Sunday.

The company has been directed to issue 3,695 crore equity shares of the face value of Rs 10 each at an issue price of Rs 10 each within a period of 30 days after issuance of necessary order from relevant authorities, including from Securities and Exchange Board of India.

"Post the aforesaid issuance of equity shares, the Government of India shareholding in the company will increase from existing 22.60 per cent to approx. 48.99 per cent. The promoters will continue to have operational control of the company," VIL had said.