Strong signal for telecom sector after successful Vodafone Idea FPO

The success of the massive Vodafone Idea (VIL) follow-on public offer (FPO), which raised Rs 18,000 crore, coupled to a subscription of fresh equity worth Rs 2,075 crore by an Aditya Birla group company has triggered some optimism about the telecom sector.

VIL intends to raise around Rs 25,000 crore from the market. If it can utilise the funds to roll out 5G and strengthen its 4G presence (around Rs 12,700 crore is allotted to network capex), the threat of India’s telecom services market turning into a duopoly recedes. Among the other private telecom service providers, Reliance Jio (Jio) did well in FY24 with results in line with consensus, while Bharti Airtel is also estimated to do well (first three quarters have been good).

VIL’s successful FPO has a direct positive impact on Indus Towers. Indus will obviously benefit from added demand as and when VIL rolls out its new network. Analysts see higher tenancy ratios on Indus Towers plus the payment of about Rs 6,000 crore of receivables from VIL. Indus Towers has a policy of paying out its entire free cash flow (FCF) as dividends and it should generate FCF in FY25.

Another key factor for bullish sentiment is an assumption that all three private sector service providers will be able to hike tariffs at least twice, by at least 15 per cent in the next 2-3 years. There have been large capex outgoes for Airtel and Jio. Capex intensity is easing off for Airtel and Jio. But they need to raise ARPU to generate decent RoI (return on investment). All three service providers have raised tariffs in FY24.

VIL and Airtel have an instant ARPU upside if they can convert voice-only 2G users to 4G (all Jio users are data-enabled). Between them, VIL and Airtel have almost 200 million legacy 2G users and upgrades to 4G would have two positive outcomes. It would instantly raise the ARPU substantially. Second, it would enable VIL and Airtel to start to shut down 2G, and that would also be a cost-saver.

Jio and Airtel also believe they will be able to generate revenues from servicing enterprise needs on the fast 5G networks. They may be able to assist enterprises to set up internal networks, implement data analytics platforms and they can offer hyperscale/ data centre services. This concept of the telco becoming a “techco” has been seen in other telecom markets. Some analysts cite examples to show that it is possible for a telecom service provider to generate close to 50 per cent of its revenues from value-added services. 

A reduction in AGR (Adjusted Gross Revenues) dues is also possible according to legal analysts. There is a chance of a favourable verdict in an outstanding curative petition on AGR initiated by VIL which has Rs 70,000 crore AGR dues. Bharti has Rs 36,000 crore in AGR liabilities which may also come down. This would be a huge relief to VIL and substantially improve Bharti’s prospects, too.

The moratorium on spectrum and AGR payouts ends on 30 September, 2025, with VIL having Rs 27,000 crore payout in FY26. From FY27 to FY31, annual payments would be Rs 41,500 crore. AGR reductions and yet another conversion of debt into equity by the Centre is possible.

The share prices of Indus Towers, Airtel, VIL have all gained significantly after the successful FPO of VIL. It is more difficult to assess the Jio contribution in the valuation of its parent Reliance Industries (RIL). But analysts have upgraded the Enterprise Value of Jio in their valuation models.