The court finally agreed to a 10-year payment term, and investors have concluded that this gives Vodafone Idea a new life. Its shares have risen 36% since the court’s verdict was announced. And with clarity on AGR quotas, the company has said it will leverage markets to increase ₹25 billion rupees through simultaneous issuance of equity and debt.
So far so good. But saving the Vodafone Idea is still a work in progress, and the heavy lifting will now have to be done by its humble subscribers. The $ 3.4 billion fundraiser, if successful, will simply help address cash flow needs through the next fiscal year. Note that the ₹The 25 billion rupees it raised through a rights issue last year is now sold out.
To balance cash flow in fiscal 23, Voda Idea’s average revenue per user should more than double, according to analysts at Kotak Institutional Equities.
“The company needs a combination of (a) a sharp and rapid improvement in prices, (b) a flawless delivery of new cost reduction targets, (c) competitive network expenses to stop the trend of erosion of participation market and (d) any capital contribution. Vodafone Idea’s chances of survival without a significant price increase are grim. In our opinion, the capital injection will also require price increases, “they wrote in a note to clients on September 1.
In short, several things need to fit together for the company to survive, although the most critical is price, which needs more than double.
Given that the government reportedly had a role to play in telecoms’ timed price increases last December, a commonly held view is that it should take similar steps to ensure higher rates and, in turn, time, the viability of Vodafone Idea. After all, you have the most to lose if the company goes bankrupt, with installments of approximately ₹1.5 trillion in terms of present value.
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“It is the government that faces the maximum payback if Voda Idea goes down. Spending time regulating minimum rates or losing sight of the big picture, in this context, would be tantamount to the government letting a situation evolve in which massive value is transferred from the government (as well as from the company’s shareholders and other creditors) to competitors Reliance Jio and Bharti Airtel, “Kotak analysts said in the note.
Jio is known to be reluctant to raise tariffs, as it interferes with his aggressive strategy of seeking market share. If the government intervenes and establishes a minimum rate regulation, Vodafone Idea would have a better chance of surviving. This could ensure that the government does not transfer value to Jio and Airtel, but it also means that underwriters take care of it.
This brings us back to the government’s flawed spectrum auction process, where companies ended up bidding excessively high amounts and are now left with unsustainable debt. While Jio’s entry in 2016 resulted in a drop in rates, subscribers will soon be looking at rates that are even higher than pre-Jio levels.
Kotak analysts said that Vodafone Idea’s Arpu should be raised to ₹245 to achieve a cash flow balance in fiscal year 23. In mid-2016, prior to the launch of Jio, the former Idea Cellular Arpu hovered around ₹175. It can be argued that customers now get unlimited voice and much more data, but the fact is also that costs have increased for users at the base of the pyramid, and companies are now resorting to minimal recharges.
The irony, when it comes to the future of Vodafone Idea, is that the rate increases will strengthen the position of its competitors. Their balances are smaller, and rate increases will make them more cash rich. This can result in higher spending on the web and better offers for subscribers. Vodafone, which is already losing market share at a rapid rate, may find it difficult to keep up.
“Jio and Airtel already have much better networks and are investing larger amounts,” said Nitin Soni, a senior director at Fitch Ratings. Relatively smaller investments in its network have resulted in a drop in revenue market share from 41% in fiscal 2017 to 21% in the June 2020 quarter, data compiled by Jefferies India Pvt. Ltd. showed.
“The order from SC is not so much a new life, but an extension of the misery of Vodafone Idea,” said an analyst at a national institutional brokerage agency, requesting anonymity.
But even if the court had demanded an advance payment of all the AGR owed and ended the misery of the company, that wouldn’t be much of a respite for underwriters. The resulting duopoly would have meant an eventual sharp increase in tariffs in any event.
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