Why govt could be the biggest loser if Vodafone Idea fails

The crisis at Vodafone Idea (VIL) has escalated in the last few days after the Supreme Court dismissed pleas of telecom companies to recalculate the adjusted gross revenue payable to the government.

A big question is what happens if Vodafone Idea fails? The company has been losing customers for some time now. Yet, according to the Telecom Regulatory Authority of India, VIL had 277.62 million subscribers at the end of May. The company also has thousands of employees. A big uncertainty looms over them if the company is not rescued.

Kumar Mangalam Birla wrote to the government talking of irretrievable point of collapse and even offered to give up his stake. Vodafone, too, has made it clear that it will not be putting in any more equity into VIL.

The industry that once had more than a dozen operators, has been reduced to just three, apart from the state-owned BSNL. If VIL were to collapse, whether there is enough capacity to absorb its subscribers and employees in a short period, is a big uncertainty.

Perhaps, the biggest loser could be the government itself. Back in 2019, when the Supreme Court dealt a big blow to the telecom companies by ordering that the telecom companies must include non-core revenues in their AGR payments and would also have to pay penalty and interest, the government was staring at a huge windfall of thousands of crore in additional revenues.

Vodafone Idea, which had merged their businesses in 2018, would itself have to pay more than Rs 58,000 crore in AGR dues. But now, there is a real possibility that the government could lose all of that and some more in other receivables like the deferred spectrum payments.

According to various estimates, VIL owes around Rs 1.5-1.6 lakh crore to the government. It has Rs 16,000 crore for annual spectrum payment and Rs 8,400 crore for AGR dues coming up in March, April 2022 itself. But, with a loss of Rs 44,233 crore in the year ended March 2021, it is in no position to repay its debts, which stood at Rs 1.86 lakh crore (including interest accrued, but not due and AGR liability) as of March 31.

“It has become very difficult for VIL to service its huge net debt at 10 times net debt/EBITDA (earnings before interest, taxes, depreciation and amortisation), in this pricing environment where tariffs are much below sustainable level. Now, promoters have refused to infuse additional equity into the company. With K. M. Birla stepping down from the chairman post and the current state of the company’s financials, it would be difficult to raise money from other institutional investors,” said Piyush Pandey, lead analyst – institutional equities, Yes Securities.

VIL’s collapse will clearly blow a big hole in the government’s revenues. Banks, too, are staring at another hole in their balance sheets and a jump in their non-performing assets.

“The group’s liquidity position is poor with Rs 7,000 crore of debt maturing in FY22, and AGR due

payments are likely from next year. VI also has a negative net worth, and could, therefore, be a potential risk to higher NPLs (non-performing loans) for the sector and select banks,” said analysts at Nomura Securities.

According to the broking firm, the country’s largest lender State Bank of India has the highest exposure to VIL in terms of value at Rs 11,000 crore. Another state-owned lender Punjab National Bank has Rs 3,000 crore exposure. Several private banks, including Yes Bank, IDFC First Bank, IndusInd Bank, Axis Bank, ICICI Bank and HDFC Bank, have exposure to VIL.

For the larger lenders like SBI, as a percentage of the loan book, VIL accounts for just 0.5 per cent. But, it is more worrying for smaller lenders like IDFC First Bank, Yes Bank and IndusInd Bank.

The absolute exposure of the three banks to VIL stands at Rs 3,240 crore, Rs 4,000 crore and Rs 3,500 crore respectively, according to Nomura. As a percentage of loan book, it translates to 3 per cent, 2.4 per cent and 1.7 per cent respectively. The VIL exposure is 16.1 per cent of the networth of IDFC First Bank, 12 per cent for Yes Bank and 7.9 per cent for IndusInd Bank.

“VI has about Rs 92,300 crore of deferred spectrum payment obligations, against which we believe, banks would have issued bank guarantees only for the portion of current liabilities. The gross non-funded exposure by banks is Rs 23,700 crore. In case of a default, only these current non-funded exposures are converted into debt and thereafter, treated as an NPL,” the Nomura analysts said.

So clearly, in a situation where VIL fails, banks and more so the government are staring at huge haircuts.

With promoters unwilling to put in more money and external funding still elusive, the government may be left with little options to bail out the troubled telecom company. The government is reportedly working on a relief package for the sector. That could certainly offer some relief. But, there is no official response yet from the government to Birla’s letter that was purportedly written in June.

There is also an opinion from some experts that the government should take over VIL and merge it with BSNL.

The Department of Telecom is learnt to have held a meeting with senior bankers last Friday to discuss the VIL issue. While VIL hasn’t defaulted yet, some of the lenders may have already started making provisions to prepare for such a possibility.

The government could well convert the debt to equity. This could help banks as well as the government. But, that will also make the banks among the largest shareholders in the loss-making telecom company.

The Narendra Modi government has been pushing a “Digital India” initiative hard for a few years now. Telecom sector is critical if this has to succeed and grow. A collapse of one telecom company will clearly hinder this.

There is no doubt that the government needs to act fast in the case of VIL and the wider telecom industry. What steps it now takes must be keenly watched.

India’s telecom sector has been among the fastest growing and there remains a huge potential for growth, given that internet penetration remains low compared to other markets and many in India’s hinterlands lack access to telecom services. 

That should ideally attract more investors and companies to the market. Instead, there has been a wave of consolidation in the last few years as the companies found the going tough amid extremely low prices. A collapse of VIL could further dent investor appetite in the sector.