Recent research reports indicate that Vodafone Idea will be forced to shut down business in the wake of the controversy related to AGR dues.
Vodafone Idea’s AGR burden is huge at Rs 442 billion or $6 billion, representing 43 percent of net debt. Vodafone Idea management has stated the company will opt for insolvency if no big relief is provided, says Deepti Chaturvedi at CLSA.
A two player market?
Vodafone Idea is not in a position to make $3 billion payment upfront, while the recent QIP by Bharti Airtel makes them better placed to do so.
“If it finally comes to the telcos making an upfront payment- VIL may look to shut up shop, and in that event we see the possibility of govt. intervention to resolve the situation- it is however unclear how the govt. may go about it,” DSP Merrill Lynch research analysts Sachin Salgaonkar and Sukriti Bansal said.
Every incremental decision pushes India to a two telecoms market. Both the review petition and the modification petition have not been favorable to Vodafone Idea — pushing India towards a two player market.
Two player market is not an ideal situation because telecoms networks of Airtel / Jio may not withstand load of 300 million users.
Second, the banks have huge exposure to Vodafone Idea debt and there may be a cascading effect. Third, there will be economic impact on GDP and job losses.
The possible shutting down of Vodafone Idea network will impact telecom network suppliers such as Nokia, Ericsson, Huawei and IT companies such as IBM.
Vodafone Idea lost momentum
Vodafone Idea added just 8.3 million 4G subscribers in Q3 against Bharti Airtel adding 21 million subscribers. Airtel has benefited from Jio charging for off-net calls.
Vodafone Idea’s revenues improved 2 percent quarter-on-quarter to INR 111 billion and a similar growth in ARPUs, at INR 109. The company has achieved 85 percent of its targeted INR 84 billion Opex synergies and the rest is expected to accrue by Q1FY21.
Quality concerns
The AGR judgment has raised concerns on Vodafone Idea’s survival with an exhausted balance sheet.
Vodafone Idea’s ability to invest in networks, which has been the single largest reason for the company losing subscribers, seems to have taken a back seat.
Vodafone Idea’s Capex in the last 7 quarters stands at INR 19 billion vs. Bharti Airtel’s at INR 28 billion. This has resulted in Vodafone Idea adding c47 million 4G subscribers, Airtel adding 66 million, while Vodafone lost overall 131 million subscribers, all during the same period.
Data subscribers have just grown by 0.3 million for Vodafone Idea vs. Bharti Airtel, which added 44 million in the same period.
Vodafone Idea will not have enough cash to invest in Capex, if AGR repayments are not spread over at least 9-10 years.
The recent developments are positive from a Jio’s perspective, as it may help the company to accelerate its market share aspirations of more than 50 percent. In addition, the ability to raise tariffs may help the 4G market leader, Rajiv Sharma and Anshul Agrawal at SBI Cap Securities said.
Since Bharti Airtel and Vodafone Idea have shared infrastructure, there will be an increase in Capex post a potential Vodafone Idea shut down.
Vodafone Group Plc could lend Vodafone Idea the money, breaking the ring-fence on further investment into India. “We find it unlikely that Vodafone will contribute as it would be taken so negatively by plc shareholders without which the company is very likely to be bankrupted, New Street Research wrote.
At end-3QFY20, gross cash on Vodafone Idea’s books (just under Rs 130 billion) was less than a fourth of its LF+SUC AGR-related dues, according to Kotak Securities.
Customers of Vodafone Idea will be forced to shift to BSNL, Bharti Airtel and Reliance Jio enabling the operators to ensure strong revenue streams. But telecoms need to invest more in network to handle additional voice and data pressure.
