Vodafone- Idea—A new lease of life?

Vodafone- Idea—A new lease of life?

By Professor Surya Mahadevan, T. A. Pai Management Institute

Vodafone-Idea (VI) number 2 and 3 in the telecom sector merged in 2017 to become the market leader with 41% revenue market share. In the following 4 years, in the most inexplicable manner, the merged entity witnessed its revenue market share plummet to 21%. In a rash of setbacks Vodafone Idea lost their AGR case in the Supreme court which created an incremental debt burden of Rs.58000 crores. The quarterly losses added to the misery and the company’s net worth became negative. Clearly VI was facing a serious existential crisis and the company and its chairman made repeated representation for succor.

Finally, we have a near comprehensive policy announcements by Government in September 2021. Does the reform package addressing the issues in the sector constitute an effective ‘rescue’ of the drowning VI?

This question needs due consideration of the order of the financial stress at VI, additional investments required for 5G, balance spectrum validity and license period of VI, potential let up (? ) in the competitive intensity leading to ARPU increase, promoter’s appetite for risk/reward and cannot be predicated on just the reform package.

We will therefore address this question in 7 parts starting with the composite reform package from the government

1. A) Structural Reforms its impact on Vodafone- Idea

Reform	Impact on Vodafone
1. Rationalization of Adjusted Gross Revenue: Non-telecom revenue will be excluded on a prospective basis from the definition of AGR.	This does not help with the retrospective burden. Gain going forward for all the operators. Moderate impact on Vodafone going forward
2. Bank Guarantees rationalized	This is a good reform and may free up locked up cash/collateral and reduce servicing fee. However large corporate may have no trouble raising BG at low servicing cost. Very low impact on Vodafone going forward
3. Interest rates rationalized/penalties removed	There is no change in the interest and penalty on past AGR dues and this benefit will apply prospectively only. Rationalisation of interest rate and penalty is a good reform, long overdue No impact on Vodafone going forward as default is an exceptional event

Reform	Impact on Vodafone
4. For auctions held henceforth, no BGs will be required to secure instalment payments.	Good reform and long overdue Very low impact on Vodafone Now
5. In future auctions, the tenure of spectrum has been increased from 20 to 30 years.	This is also prospective but a big win for all operators as it gives more time to realize the returns on investment in spectrum and tower infrastructure. This is a smart move designed to reduce the effective price per year/per unit of spectrum by one-third without reducing the base rate. Big impact on Vodafone for all new spectrum bought including 4G and 5G and for renewal
6. For spectrum acquired in future auctions, the surrender of spectrum will be permitted after 10 years.	Good reform that was long overdue. The 10-year period could also have been reduced to anytime surrender. May have helped if this was allowed for current spectrum holding as well No impact on Vodafone going forward as surrender is an exceptional event
7. No SUC will be levied for spectrum acquired in future spectrum auctions.	Currently, telecom service providers pay around 3-5 per cent of adjusted gross revenue. This charge will however apply for existing spectrum holding, though the expectation is it will be brought down This is a gain going forward for new spectrum. Immediate impact is low, but this could become significant in the long term
8. Spectrum sharing will be encouraged, and the additional SUC of 0.5% for spectrum sharing removed.	This creates an opportunity for reciprocal sharing of spectrum to optimise and reduce the need for total spectrum. Hopefully all the 3 operators will come together in most circles to share resources and optimise their cost Low impact as the cost saved is marginal.
9. 100% Foreign Direct Investment under the automatic route will be permitted in the Telecom Sector	Provides flexibility/option for Vodafone to buy out Idea and completely own the business if the partners are not aligned on investment. Moderate impact from Vodafone’s perspective

Let us next look at the reforms that address the cash flow and liquidity issues in the telecom sector

1B) Liquidity Reforms in the telecom sector

Instant relief for financial

stress

Impact on Vodafone

1. Moratorium/deferment of AGR dues up to four years

Vodafone is under acute liquidity crisis and hence this move will help them conserve their resources for launching 5 G. This is a substantial impact from liquidity

point of view

2. Moratorium/deferment on due payments of spectrum purchased in past auctions

These are annual dues and deferment provides relief to Vodafone.

This is a substantial impact from liquidity point of view. All deferment will however increase interest cost, even while accumulating principal repayment liability in the

long term

And finally let us look at the most inspired reform in terms of converting debt to equity

1 C) Conversion of debt to equity- Business continuity reforms

Government absorption of

financial stress

Impact on Vodafone

1. Option to TSPs to pay the interest amount arising due to the said deferment of payment

by way of equity.

This is a major win and Vodafone may want to opt for this. It converts the debt to equity and increases the government commitment as an equity partner.

The government has pulled off an impossible reform

2. The amount due towards deferred payment may be converted to equity, at the option of the Government, at the end of the Moratorium/deferment period. The guidelines for the same will be finalized by the Ministry of Finance.

This is a major win and Vodafone may want to opt for this. It converts the debt to equity and increases the government commitment as an equity partner.

This is at the discretion of the government and the guideline will provide more perspective

The moot question is how Vodafone Idea can offer equity in the order of Rs.1.86 lakh crores or even half that without bringing in equivalent equity themselves as the current net worth is negative

The government also took the opportunity to announce a slew of reforms on the procedural aspects of how the service providers engage with the policy and regulating bodies. This improves the ease of doing business and enables planned addition to spectrum resource

Of the reforms package the final bundle offering conversion of debt to equity is possibly the most clinching case for business continuity. Redefinition of AGR for revenue share payout, increase in the spectrum tenure and reduction in the SUC for new spectrum are other key reforms

Notable omission in the reforms package

Reduction in GST (Service tax)
Reduction in revenue share
Removal of SUC for all spectrum bought under auction
Minimum tariff for Voice/data and/or capping of bundled voice at different monthly commitment

The slew of reforms is deep and addresses long outstanding issues of the sector. It is possible the misses will also get addressed in stages over a period of time. The government could not reverse the adverse impact on account of AGR ruling by Supreme court; nor could it reverse the revenue erosion on account of competitive play, even if it can be held culpable for allowing a predatory attack by Reliance Jio.

Within the constraints, government has offered a comprehensive reform program that is a big win for the sector. It is inevitable such reforms can be better leveraged by strong players like Jio and Airtel. For Vodafone, among other things, the reform package contains hope of debt being converted to equity. Is this enough??

2. Financial position of Vodafone Idea

The financial results of Vodafone captures their stress in the most eloquent terms

Vodafone- Idea Financial results Summary (Figs in Rs. Million)
Particulars	Quarter ended	Year ended
Particulars	31-Mar-21	31-Mar-21	31-Mar-20
Total Income	96,478	4,21,264	4,59,968
Operational Expenses	51,989	2,50,065	3,00,450
Finance Costs	47,066	1,79,981	1,53,920
Depreciation & Amortization Expenses	58,101	2,36,385	2,43,564
Total Expenses	1,57,156	6,66,431	6,97,934
Profit/Loss before exceptional items	-60,678	-2,45,167	-2,37,966
Exceptional Items **	-9,726	-2,21,036	-3,87,242
TOTAL COMPREHENSIVE INCOME/(LOSS)	-69,874	-4,67,089	-7,49,557
Net worth		(382,280)	59,799
** Exceptional Items includes AGR Dues, spectrum charges, merger costs etc

Financial Summary

The Company has incurred losses of Rs. 467,000 Mn for the year ended March 2021 Net worth is negative at Rs. 382,280 Mn.

Total debt (including interest and AGRliability) is at Rs.1,867,790 Mn. Debt to equity ratio is -4.27 as the equity is in negative area

Birla with 27%, and Vodafone with 44% — unwilling to pump in more money

Key takeout

The operating income is barely adequate to meet the running finance costs and with depreciation is not covered, the net position is loss

Ability to raise debt from market or financial institution or vendor impaired Investment in 5G spectrum and electronics coming up soon

The financial position indicates that the company is possibly in too serious a trouble to be bailed out. The government has possibly recognized that if the company goes down, they will have to directly suffer the financial loss on account of AGR and spectrum dues and interests and the balance burden would also be borne by public sector financial institutions. The effort to convert this debt to equity to make the promoters bring in fresh equity was the only viable alternative

3. Additional investments required for 5G

Vodafone must concurrently invest in 4G and 5G. The critical question how much they can prioritize on markets that will adopt 5G and commit investment in a phased manner

5G technology will guzzle up more investment upfront while the returns will be delayed based on adoption and demonstration of use cases. Yet not participating in 5G play can seriously hamper the brand image

5G will demand investment in infrastructure related to enhanced mobile broadband, IoT, and mission-critical applications. These use cases will require network performance to increase 10-fold over current levels across all network parameters, as measured by latency, throughput, reliability, and scale.

To get there, mobile operators must invest in all network domains, including spectrum, radio access network (RAN) infrastructure, transmission, and core networks.

The best option for VI would be to look at partnership with all the stakeholders— Government, Vendors, Mobile service providers and enterprise customers

4. Balance license period and the financial outlook in this period?

Vodafone- Idea bought spectrum in the period 2014 to 2016 for a 20-year period and this will now come up for renewal between 2034 and 2036. The residual life for many key circles is 13 years. In 13 years can Vodafone generate operational resources to pay of its debt of Rs.1,86,000 Crores, invest in 5G roll out and also get a fair return for their investment? Can they take the risk of bringing in promoter capital and bet on making a business turnaround? It is a tall order when currently the operating income is just adequate to meet the running finance costs

5. Competitive play expected in the next phase?

Reliance Jio continuous to maintain its aggressive tariff stance and the hapless incumbents are choking in terms of bottom-line and also the need to build capacity.

Vodafone requires a sharp 60% increase in ARPU (30% immediately with hope of another 30% in the near future ) to move from the red zone to the black zone on an incremental basis.

This is not likely to happen in a harry as Jio may wait to hit 50% market share before raising tariff. It is also possible that Jio may simply roll out 5G at a premium and take only a modest increase in tariff for 4G. They have another 7 to 8 years of validity for some part of the spectrum and another 13 years for balance part. They have the financial depth and critical market share to play the waiting game. All the reforms in the sector provide a very big upside for Jio and they will be emboldened to stretch their market leadership

If Vodafone makes the same grave assessment of competitive play, they may well be tempted to throw in the towel as without 30% to 40% increase in tariff their ( VI) operating income will not be adequate to meet the financing cost

6. Opportunities available to Vodafone to improve their market share, pare down operating cost and improve their financial

Vodafone has to first find the resolve to stay in the fight to send the right signals to all their stakeholders— Employees, Vendors, investors, financial institution and other mobile service providers.

Without a grand statement of its long-term intention backed with evidence of promoter equity infusion, they cannot inspire any confidence to stitch together partnerships that will be so critical for business growth

After the confidence is restored Vodafone can explore

Spectrum partnership with other operators Sharing of active network or even ICR

Business equity partnership the government

Vendor partnership for deferred payment towards electronics or part conversion to equity

Selective and phased roll out of 5G

Enterprise partnership for 5G applications

7. New perspective of 10 years plus 30 years license period

Vodafone may have to hard question on the business case in the balance spectrum validity period under different scenario

On the positive side, Government reform package holds out promise of converting good part of debt to deferred payment or even to equity. The promise of 5G and a more matured Oligopoly market make the business appealing

On the negative side, the big ask in terms of 5G investment, need for promoter equity in large measure before converting balance debt to government equity and the indefinite pressure on low ARPU argue for not throwing more good money after bad

Eventually it is about the promoter’s appetite for the business risk and reward. It is most unlikely the business case obtains in the current license/spectrum validity period.

If Vodafone- Idea literally and figuratively believe in after-life, when spectrum is extended for another 30 years, they will stay on with the hope of a gradual recovery

Article Link: https://smartceo.co/vodafone-idea-a-new-lease-of-life/

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