AGR verdict: Will Voda Idea survive? Answer lies in ability to raise funds

Increase in APRU can help Vodafone but rival Reliance Jio is in no mood for tariff hike yet

Now that the Supreme Court has allowed telcos to pay their AGR (adjusted gross revenue) dues over 10 years, will it be curtains for Vodafone Idea and the beginning of a duopoly of Reliance Jio and Bharti Airtel? Or will Vodafone Idea survive the bruises and become a much smaller player in terms of subscriber market share, albeit with a viable business model?
 
It all depends on Vodafone Idea’s strategy going forward. The question is, will the two shareholders, Vodafone and Aditya Birla Group, pump in more equity as they have very limited scope of raising more debt, which is close to 20x of its Ebitda, because they see a future in the business?
 
Also, can they rope in another partner to bring in fresh capital? This might be a challenge, considering the money that the shareholders, especially Vodafone, has written off in its Indian venture.
 
Moreover, can Vodafone Idea successfully transition from being a pan-India operator to concentrating on circles which provide it with the revenues and profits? In fact, VIL has already announced that it would focus on 16 of the 22 circles, which constitute 87 per cent of its revenues. 

 
No doubt, Vodafone Idea has certain things going for it. Bharti Airtel’s Sunil Mittal has said that for the industry to stabilise, ARPUs (average revenue per user) would need to double to Rs 300.  Mittal expects ARPUs to go up by over 60 per cent in the next six months.
 
The regulator, too, is pushing for a cap in the base tariff price so that they are not below cost and, clearly, Jio is also in no mood to play the price game anymore. However, it has not taken a call on a tariff hike yet, and if it does not, it will be a dampener for Vodafone Idea. 
 
But the good news ends there. Vodafone Idea’s Ebitda of Rs 4,100 crore in the June quarter of FY21, is not enough to pay for Vodafone Idea’s cap­ex, interest, deferred spectrum and now the AGR dues, all of which amount to over Rs 30,000 crore annually. This includes AGR dues of Rs 7,500 crore annually.
 

It will, however, have some leeway in FY21 and FY22, when, thanks to the moratorium on payment on deferred spectrum offered by the government, its normal payouts would be lower (deferred spectrum is Rs 14,000 crore per annum). But Vodafone Idea has to pay more annually after the two years.
 
In simple terms, based on Q1 FY21 numbers, nearly 45 per cent of Voda­fone Idea’s Ebitda would be used to pay just its AGR dues. And Goldman Sachs estimates that its Ebitda needs to go up 4.9x over Q1 FY21 and its ARPUs by over by 88 per cent (its ARPU in the June quarter was Rs 123) for it to be able to tide over its overall annual outflows.

 
That might seem probable, considering that even Mittal is talking about a similar rise in ARPUs. But the problem is that Vodafone Idea saw a sharp fall of 11 million subscribers in the June quarter. This trend could aggravate if it pushes up tariffs steep­ly, especially because Reliance Jio is aggressively targeting Vodafone Idea’s 2G customers with a 4G upgrade to reach its ambitious 50 per cent subscriber target. 

Vodafone Idea has also reduced its capex expenditure, a trend many say could continue as it needs to pay its AGR dues.  But this will only increase Vodafone Idea’s gap with its competitors in moving its own subscribers from 2G to 4G (which automatically leads to an increase in ARPU).    
 
The other problem is that its ability to monetise is very limited. Even if it were to sell its stake in Indus Towers, it may not  make more than Rs 4,000 crore. It could make some more by selling its fibre infrastructure. Vodafone Idea has also put together a plan to save costs by Rs 4,000 crore in 18 months. Analysts say that this could give it some breathing space till FY 22 to put its house in order.
 
But the bottom line is that the two operators have to infuse fresh capital to get VIL out of deep trouble.