Vodafone Idea: Pain over after telecom reform, or more challenges ahead?

It was indeed a much-needed relief for Vodafone idea, a debt-ridden company weighed down by huge Adjusted Gross Revenue dues.

The government's relief package for the telecom sector allows Vodafone Idea to defer a cumulative payment of nearly Rs 1 trillion, which means Rs 24,000-Rs 25,000 crore annually, over four years. Vodafone Idea has paid the government $1.07 billion in AGR dues, but it still owes roughly Rs 50,000 crore and is saddled with a net debt of Rs 1.91 trillion.

Here's how the top brokerages reacted to the announcement. And, if you read the comments carefully, you will get a sense of the situation Vodafone idea has been in.

• JP Morgan: Moratorium ensures Vodafone Idea's survival, tariff hikes still needed for returns
• Jefferies: Relief for VIL and could lead to govt taking up a sizable stake in company
• UBS: Will closely monitor relief measures are followed by tariff hikes
• CLSA: Will result in $11-billion cash-flow savings till FY25
• Morgan Stanley: Should be supportive of ARPU increases
• Edelweiss Securities: Will require not only capital infusion, but also a sizeable tariff hike for 4G pre-paid customers
• Motilal Oswal Securities: Ballooning debt and payment after four years will be difficult to address

There is no doubt that it's a big relief for the crisis-hit company that will help its cash flows and boost its survival chances significantly.

But there are still some big challenges for the company to tackle.

The accrued interest during the four-year moratorium span would further add to the telco’s Rs 1.9-trillion debt. Remember that the company has not been able to raise funds and is also losing customers in droves every quarter.

Even if the company raises funds in the near future, those funds would be deployed for the network instead of paying government dues.

And, if Airtel invests heavily in the network, that will automatically put pressure on Vodafone in terms of market share.

Road ahead for Vodafone

The analysts also believe that the government could hold anything between 30 and 70 per cent in Vodafone Idea.

Just to recall, an equity option was offered by the government for converting the company’s dues after a four-year moratorium.

The telecome relief proposal comprises two options:

First, operators have been given the option to convert their interest dues on spectrum and AGR payments, after a four-year moratorium, into equity to the government.

Second, only the government has the option to convert the principal amount into equity to be paid as instalments for spectrum and AGR dues for four years after the moratorium.

But there is a concern that if both options are taken, it will turn Vodafone Idea into a government company. This in turn would dissuade potential strategic investors from investing in the company.

For now, we believe that the company will continue to scout for new equity investors and invest in new technologies, including 5G.
 

Watch this video to get more clarity on Vodafone Idea's pain over after telecom reform: