Vodafone Idea FPO open for subscription. Should you invest?

The Rs 18,000 crore follow-on public offer (FPO) of telecom company Vodafone Idea kicked off on Thursday. As of 3.30 PM, the issue was subscribed just 0.18 times (18 per cent), consolidated bid details from stock exchanges showed. While the qualified institutional buyers' (QIB) portion was subscribed 0.42 times, non-institutional investors subscribed 0.14 times and retail individual investors' portion was subscribed 0.05 times. The issue closes on Monday, April 22.

The company has lost millions of customers in recent years, made losses, has huge debt, and has had to be bailed out by the government by converting dues to equity two years ago. In this backdrop, the share sale is crucial for it to strengthen its balance sheet and get the much-needed funds to compete with larger and stronger rivals—Bharti Airtel and Reliance Jio.

This FPO is the largest by any company in India and has already garnered strong interest from institutional investors. Vodafone Idea secured Rs 5,400 crore from anchor investors, which included some of the large global entities like GQG Partners, UBS Funds Management, Citigroup and Abu Dhabi Investment Authority. Several domestic mutual funds and insurance companies like HDFC MF, SBI General Insurance, Quant Mutual Fund among others too picked up Vodafone Idea's shares in the anchor round.

The FPO is priced at Rs 10-11 a share, which is a 17-29 per cent discount to the share's closing price on Tuesday. On Thursday, the stock was up 3.25 per cent at Rs 13.34 on the BSE.

Vodafone and Aditya Birla Group-owned Idea Cellular had merged in 2018, creating the country's largest telecom operator at that time with 408 million customers. The company has now slipped to the third position with 215.2 million subscribers at the end of December 2023 as it has lagged behind its rivals in network expansion and enhancement. In contrast, Reliance Jio now leads the market with 470.9 million subscribers and Airtel has 397 million.

Speaking with reporters earlier this week, Vodafone Idea's chief executive Akshaya Moondra said the company would start rolling out 5G in six to nine months following the fundraising and plans to cover 40 per cent of its revenue coverage over the next 24-30 months. Apart from the FPO, the company is also raising Rs 2,075 crore from promoters and it is also in discussions with banks to raise additional funds. The fundraising should help the company meet capex requirements for three years, Moondra told a daily separately.

But, Jio and Airtel have had 5G services across the country for more than a year already and that has led a lot of customers switching over to these services.

Another challenge VI has is almost 42 per cent of its customers are still not on 4G. So, its average revenue per user (ARPU) is also among the lowest of the three private players. In the December quarter, its ARPU was at Rs 145 per month, up from Rs 135 a year ago. In comparison, Airtel had an ARPU of Rs 208, while Jio's ARPU stood at Rs 181.7.

As such, India has among the lowest ARPUs in the world and there is a need for fares to go up, industry executives have long said. VI's ARPU will also get a boost by upgrading subscribers from 2G to 4G. A sizeable chunk of the funds that the company is raising will go towards expanding its network infrastructure and enhancing 4G coverage. Retaining customers and adding more will be a key challenge though for the company.

While this capital injection is expected to bolster VI's immediate outlook, substantial market share gains vis-à-vis peers are not on the horizon, said analysts at Ventura Securities.

VI also faces a huge debt problem. Moondra has pointed out that the bank debt is less than Rs 4,500 crore. But, it also has over Rs 2 lakh crore in government payments to make over the next 17-18 years.

Already in 2022, VI converted the interest related to spectrum auction installments and adjusted gross revenue (AGR) dues into equity. The government has a 33 per cent stake, making it the largest shareholder in the company.

CLSA analyst Deepti Chaturvedi observed that VI faces a financial crunch in 2025-26 when annual spectrum and AGR payments of $4 billion will fall due, unless the government converts debt principal to equity at the end of the moratorium.

However, there are concerns over any potential significant equity dilution resulting from the conversion of government dues. "Such a scenario could limit meaningful upside for VI's minority shareholders," the Ventura analysts added.

"VI has experienced a decline of approximately 19 per cent in market share post merger, attributed to inadequate network investment. Efforts are underway to rectify this by bridging the network coverage gap in 4G, aiming to mitigate some market share losses. Significant disparities in 5G coverage compared to larger competitors are expected to persist," said the analysts.

CLSA's Chaturvedi also noted that falling subscriber numbers added risks to the brokerage's forecasts.

"A continued delay to its 5G rollout could trigger further subscriber share consolidation as Reliance Jio and Bharti continue to rapidly ramp up 5G," she said.

Picking up stakes via anchor allotment, large investors may have bet on VI to turn around. Will retail and other investors take the leap of faith in the company and fully invest will have to be watched out for over the next few days.