VIL's equity plan gives some breathing space but woes far from over

Significant rise in ARPU needed to ease debt worries

Vodafone Idea’s (VIL) decision to convert government dues into equity and issue shares worth Rs 16,000 crore (at par value of Rs 10 per share) alters the financial picture in the telecom sector. While it gives VIL breathing space for four more years, the company still has a crippling debt burden. This leaves it poorly placed versus its two private sector rivals, Bharti Airtel and Jio. Airtel opted not to take the government offer to convert dues into equity, indicating that it is confident that it can service those debts. On operational variables, too, VIL is well behind Airtel and Jio.
 
VIL’s total spectrum plus adjusted gross revenue (AGR) dues will amount to about Rs 1.7 trillion, which means either further equity dilution, or estimated annual debt service liability of Rs 40,000 crore after the moratorium. In order to remain in contention, it will have to raise capital quickly, retain its subscriber base and hike ARPU (average revenue per user) to at least double the current levels. There are doubts that it can accomplish these challenging tasks in the face of strong, better-financed and more profitable competitors.
 
The shareholding split after the issue of Rs 16,000 crore of fresh equity will leave the Government of India (GoI) as the largest shareholder with around 36 per cent of equity stake. This may perhaps give VIL a better chance of influencing policy and availing of a fresh bailout. It’s an open question if the GoI will remain a passive shareholder or play an active role.
 
Another possibility is an eventual merger with the ailing public sector undertaking BSNL, which is also a highly speculative assumption and will not lead to improvement to the financial position of VIL anyway.
 
In the absence of another bailout, VIL would have to retain its existing subscriber base and double ARPU from an estimated Rs 131 (after the latest hike in Q3), which is itself substantially above ARPU of Rs 109 in September 2021, to meet the demands.

 
The cash-strapped balance sheet will make it hard to match Jio and Airtel for capex, as 5G spectrum is auctioned and 5G networks are rolled out, sometime over the next two or three fiscal years. Or else the promoters would have to look for a white knight to take over and this is unlikely, given the huge debt burden and the weak competitive position in the sector.
 
VIL lags Airtel and Jio on voice and data traffic with both its rivals having more than double the traffic. It has just 13-14 per cent of data traffic share, with Airtel holding 28 per cent and Jio 58 per cent in this key category. It has 137 million data subscribers versus 430 million for Jio and 200 million for Airtel.
 
VIL’s spectrum burden is highest at Rs 1,08,600 crore versus Reliance Jio’s Rs 65,600 crore and Bharti Airtel’s Rs 62,700 crore. VIL’s AGR dues also stand at Rs 63,400 crore. At the end of the four-year moratorium, at the discretion of the government, there will be an option for VIL to again convert principal dues into equity. If it is forced to take this route, it would be another huge equity dilution.
 
While the conversion option did not cause a surprise, it was greeted by selling. This is understandable as any equity dilution leads to a drop in earnings. VIL dropped from Rs 14.75 to Rs 11.75 on the news and it has recovered to Rs 12.85 level on Wednesday. Airtel, meanwhile, rose from Rs 703 to Rs 729 in the same period.