VIL needs promoters, govt to work in tandem to attract new investors

The struggling telecom service provider urgently needs the promoters and the government to work in tandem to attract new investors

For the last few weeks, there have been hectic parleys between Vodafone Idea Ltd’s (VIL) promoters and the government. With the government awaiting a funding plan from the company, Kumar Mangalam Birla, who rejoined the board this April after resigning earlier, met Finance Minister Nirmala Sitharaman followed by a meeting with Communications Minister Ashwini Vaishnaw. “We are waiting for a proposal, hopefully it should happen soon,” said a senior Department of Telecom (DoT) official.

The equation is simple. The two promoters, who together hold 50 per cent in VIL, have invested over Rs. 1.60 trillion and are not looking at getting returns on their money. Vodafone plc has already written off $8.6 billion in various tranches since 2010 on its Indian operations, including the carrying value of its shares in the joint venture, which is two-thirds of what it paid to buy Hutchison’s stake in 2007. It clearly has no ambitions to be in the telecom business in India any longer.

Now, the Aditya Birla Group is looking to follow the Tata Group, which sold Tata Teleservices to Bharti virtually for free and also wrote off its investment. In August 2021, Birla wrote a letter to the government saying the group was willing to hand over its shareholding to anyone the government deems fit to ensure operations continue. He is back on the board trying to make another effort to raise funds.

Sources said Birla could also put in money. Talks, they added, are on with banks to raise and reschedule loans and with three potential investors to raise Rs. 20,000 crore that VIL needs to expand its 4G footprint (it covers 90 per cent of the population compared to the competition, which has all-India coverage) and roll out 5G services.

On the other side is the government, which took a strategic call in 2021 that a duopoly (between Reliance Jio and Bharti Airtel) in the event of VIL’s closure would not be good for customers. Accordingly, on September 15, it announced a relief package for the whole telecom industry, of which loss-making, cash-strapped VIL was a major beneficiary. The objective was to smooth its financial burden following a Supreme Court order that required telcos to pay revenue-share dues to the government with interest, penalty and interest on penalty. Since the bill came to thousands of crores of rupees for each telco, the government offered them an option to convert a part of the interest from deferred dues to equity.

The move was questioned because the government had just a few weeks earlier invested mega bucks in state-owned service provider BSNL to launch 4G services.

As expected, VIL chose the option. But the government, instead of moving fast, waited 16 months to convert the dues into 33 per cent equity, taking VIL further downhill. Discussions stalled with the government insisting that the promoters should bring money ahead of the conversion as a show of confidence. The promoters contended that they had already put in huge amounts of money and were unwilling to pump in more. Instead they insisted that banks would offer them fresh loans and reschedule old ones if they had the assurance that the government would take equity first. Even investors would be more willing to reconsider putting in money, they said.

VIL suffered in the interim. The company’s net debt rose from Rs. 1.9 trillion in Q2FY22 to Rs. 2.2 trillion in Q2FY23, Ebitda margins dropped from 41.1 to 38.6 per cent and cash balances fell from Rs. 2,300 crore to Rs. 800 crore in 12 months. Blended churn — the percentage of subscribers who move to competition — jumped from 2.9 per cent to 4.3 per cent.

The government eventually announced in the first week of February 2022 that it was converting interest dues of Rs. 16,133 crore into a 33 per cent stake. It also announced that the Birla group would take steps to raise money, though the group itself did not comment.

But getting VIL back on the rails is a tough call. Sure the conversion has helped reduce its debt burden and interest payout. The other advantage is that its principal creditor is the government — in terms of revenue-share dues and deferred spectrum liabilities. This suggests that the government as a key shareholder might be able to offer more relief (the draft telecom Bill empowers DoT to do so).

Analysts say if the government does not change its stance on having three private players, it could go for further conversion of part of the dues especially after the moratorium on VIL’s payment is over (in FY26). And that could keep it afloat provided it also finds investors. As far as the banks are concerned, VIL had prioritised debt servicing over Ebitda and has not defaulted at all.

From an operations perspective, the good news is that 5G penetration of devices on VIL’s network is 8 per cent and there is no churn here so not having 5G services has not impacted it yet. Also it has held ground for the last two quarters on its revenue share from metros (where its large postpaid subscribers reside) at 23 per cent.

But overall subscriber revenue share has fallen: from 18 per cent in Q4FY22 to 16.4 per cent in Q4FY23 as customers shifted and net revenues also fell. And the company is investing enough capex to stay afloat (it is 93 per cent lower than Airtel’s), so revenue share could fall more sharply. Average revenue per user has been flat for the last two quarters.

Clearly, VIL needs a fund infusion quickly. Kotak Institutional Equities estimates that the company would require a 23 per cent increase in tariff to meet its debt repayments in the next 12 months. But with Reliance Jio unwilling to do the same as it rolls out 5G aggressively, this might not be easy. For instance, Kotak estimates that its debt repayment in FY24 is pegged at Rs. 84 billion but the cash shortage could be to the tune of Rs. 54 billion. It could blow up to Rs. 298 billion in FY26, the year the moratorium on government dues is over.

Can VIL get a new strategic investor? It could but it would want the government to give it substantial write-offs of the kind the Tatas got in Air India. The answer, then, lies in the government and the promoters working in tandem to bring in banks and new investors to the company, which still has a lot left despite its financial challenges — a substantial 223 million subscriber base (more than twice that of BSNL) and substantial 5G spectrum to boot.