With Birla’s offer to exit, it is only up to Modi govt to breathe life into dying Vodafone Idea

“Irretrievable point of collapse” if there was no immediate active support from the government is how Kumar Mangalam Birla summed up the fate of Vodafone Idea in his letter to Union cabinet secretary Rajiv Gauba in June. The country’s third largest telecom company looks to be on the brink and how. 

Telecom giant Vodafone and Aditya Birla Group-owned Idea Cellular, the second and third largest operators respectively in the country, merged their operations in 2018. The move not only made them the largest telecom company in India, but the hope also was that the strengths and synergies of the two would give them more power to take on deep-pocketed Reliance Jio, which had made an aggressive entry into the market with cheap data and free calls. 

But, the Supreme Court verdict on adjusted gross revenues dealt a big blow to the incumbent telecom companies. The apex court ruled in favour of the government and ordered the telecom companies to pay up thousands of crores in AGR dues. Being a combined entity, Vodafone Idea would have to cough up the most—over Rs 58,000 crore. 

Given the tariffs in India, which are among the lowest in the world, it was clear that for Vodafone Idea to survive and pay up these dues was going to be an uphill battle. Eventually, the Supreme Court gave them 10 years to pay. 

That bought Vodafone Idea some breathing space, but clearly not enough. They were dealt another setback last month when the Supreme Court dismissed all the pleas seeking recalculation of AGR. The telecom companies had argued that there were mathematical errors in the amount calculated by the department of telecom. However, the Supreme Court pointed out that it had already said the AGR dues cannot be recomputed. 

Vodafone Idea’s net loss in the year ended March 2021 stood at Rs 44,233 crore. While it was lower than the year-ago loss of Rs 73,878 crore, it was largely aided by cutting operating expenses. Its revenue from operations also declined 7 per cent to Rs 41,952 crore versus Rs 44,957 crore a year ago. 

In contrast, Bharti Airtel reported a net loss of Rs 15,083 crore on revenue of Rs 1,00,616 crore in 2020-21. Reliance Jio’s net profit for the year stood at Rs 12,537 crore and revenue from operations of Rs 73,503 crore. 

“VIL remains the weakest private telco. AGR dues payment extension was only a short-term breather and its survival hinges on quick capital infusion and tariff hike/floor tariff implementation,” said Bhupendra Tiwary, analyst at ICICI Direct, the retail broking arm of ICICI Securities, after the company’s fourth quarter earnings announcement. 

VIL has Rs 16,000 crore for annual spectrum payment and Rs 8,400 crore for AGR dues coming up in March, April 2022, according to the analyst, who added that the company also needs to renew bank guarantees of Rs 7,000 crore in coming months. 

It, therefore, needs urgent funds if it is to meet these various obligations in the current financial year. VIL has been looking to raise funds to the tune of Rs 25,000 crore and has been in talks with various global investors for some time now, but a deal has not yet materialised. 

“The significant amount of cash required to service its debt, leaves limited upside opportunity for equity holders, despite the high operating leverage opportunity from any ARPU (average revenue per user) increase,” said analysts Aliasgar Shakir and Suhel Shaikh at Motilal Oswal Financial Services. 

In the letter to the cabinet secretary, Birla noted that potential investors had “understandable hesitation to invest” in the absence of definitive steps related to clarity on AGR liability, adequate moratorium on spectrum payments, and a floor-price regime. 

But, fund-raising is crucial for VIL and without it, the current EBITDA (earnings before interest, taxes, depreciation and amortization) would make it challenging to service debt. 

As of March 31, 2021, VIL’s total debt (including interest accrued but not due and AGR liability) stood at Rs 1.86 lakh crore. 

“The company’s financial performance has impacted its ability to generate the cash flow that it needs to settle/refinance its liabilities and guarantees as they fall due that, along with its financial condition, is resulting in material uncertainty that casts significant doubt on the company’s ability to make the payments and continue as a going concern,” the auditors of VIL have warned.

While the company is yet to find an investor who will bring in much-needed funds, despite VIL’s ongoing efforts for the same, the promoters, too, don’t seem keen to pump in any more money. 

As per the shareholding pattern for the April-June quarter, promoters held 72.05 per cent stake in VIL (including foreign shareholding of 53.57 per cent), while public shareholding stood at 27.95 per cent. 

“...I am more than willing to hand over my stake in the company to any entity – public sector/government/domestic financial entity or any other that the government may consider worthy of keeping the company as a going concern,” wrote Birla in the letter. 

Vodafone, too, isn’t keen on investing more.

“It is a highly stressed situation, a difficult situation that they (VIL) are trying to navigate. We as a group try to provide them as much practical support as we can, but I want to make it very clear, we are not putting any additional equity into India,” Nick Read, the group CEO of Vodafone, told investors over a conference call. 

When Vodafone and Idea had completed their merger on August 31, 2018, VIL shares closed at Rs 49.50. As of Wednesday’s close, VIL shares had fallen 27 per cent to Rs 6.03 since the Kumar Mangalam Birla letter surfaced on Monday. On Thursday, the shares fell further below Rs 6. On the other hand, Bharti Airtel shares have surged. The stock hit an intraday high of Rs 619.20 on Thursday, inching closer to its record high of Rs 623, before retreating a bit. 

The mounting financial woes have led to VIL cutting back on its capex. Even in the recent round of spectrum auctions in March 2021, VIL bought the least spectrum. It spent Rs 1,993 crore to acquire 11.8 MHz in five circles.  In contrast, Bharti Airtel spent Rs 18,699 crore and Jio Rs 57,123 crore to buy spectrum. VIL’s subscriber base also fell and at the end of the March quarter, it had 267.8 million subscribers compared with 408 million subscribers it had at the time of the merger. 

After the interconnect usage charges were stopped earlier this year, average revenue per user across the industry has declined and analysts have, for long, called for a rise in industry-wide tariffs for improvement in health of telecom companies, especially VIL. Bharti Airtel has recently raised prices for its entry-level prepaid plans and the hope is that the others, including VIL and Jio will follow suit. That should help augment ARPUs a bit, but more price hikes will be needed later, too. 

Analysts at Deutsche Bank recently wrote that the only viable solution was for the government to recapitalise VIL by converting debt to equity and merging it with BSNL. 

Bharti Airtel’s CEO Gopal Vittal, too, has said that a country as large as India needs a three-player market. He also said that there was serious financial stress in the industry and hoped that the government would provide some relief.   

All eyes will now be on the government. Kumar Mangalam Birla’s letter was written back in June. Two months since, the government is yet to respond. A newspaper report earlier this week quoting unnamed officials said the government was preparing a relief package for the telecom sector, but there were no plans to respond to Kumar Mangalam Birla’s offer. On Wednesday, Birla stepped down as non-executive chairman of VIL. Himanshu Kapania, currently a non-executive director and former MD of Idea Cellular, will replace Birla.   

While Reliance Jio and Bharti Airtel have announced their earnings for the June quarter, VIL is yet to do so. The results should offer more clarity on the state of stress the company is in. The government had already cleared a Rs 70,000 crore revival package for the state-owned BSNL back in 2019. Whether it will come to the aid of the private telecom operator is something to watch out for. 

For VIL, the writing is clear. It needs funds to survive. A failure will have a widespread impact. “The VI story is unfolding with potentially far-reaching consequences for Indian business. The Supreme Court verdict on AGR dues made the situation precarious for the company, which is now heading for default on loans. If this happens, it will impact a few banks, too, since the debt to banks stands above Rs 23,000 crore,” said V. K. Vijayakumar, chief investment strategist at Geojit Financial Services. 

He says Birla’s offer to give up his stake should be welcomed and the government should explore all options given the huge stakes.