A recent report from Goldman Sachs Global Investment Research indicates that Vodafone Idea is likely to down size its telecom business in India.
Vodafone Idea has 30 percent revenue market share of the wireless industry in India as of March 2019. Data from telecom regulator TRAI indicates 29 percent of Vodafone Idea’s revenues come from ten service areas where Vodafone Idea is ranked either number 3 or 4 in terms of market share.
The report said these service areas have lower profitability vs. the company’s other circles of operations. If Vodafone Idea decides to scale back operations in these service areas in order to rationalize costs and Capex, the company’s market share could be 8 percentage points lower in FY21.
Vodafone Idea has 110 million 3G + 4G subscribers as of June 2019. Given the company’s relatively weaker balance sheet and lower Capex vs Bharti Airtel and Reliance Jio, some of its mobile data subscribers could potentially be at risk of churning out.
Vodafone Idea had a net-debt-to-EBITDA ratio of 18x as of June 2019 including potential proceeds from tower sale. The company has a gross cash balance of $3 billion as of June 2018 and $3.8 billion including potential tower sale proceeds, but its cash burn rate remains high at close to $600 million per quarter.
Vodafone Idea may need to raise capital in four to five quarters, or potentially scale back operations in some service areas. Vodafone Idea’s current cash-burn rate would imply the company’s cash balance could reach very low levels by September 2020.
Vodafone Idea’s intent to monetize fiber assets could provide some more headroom to the company. Vodafone Idea’s underlying EBITDA excluding synergies remains under pressure, and is likely to be further pressured by interconnect revenues going to zero from January 2020.
Vodafone Idea has about Rs 40 billion annual debt repayment obligations over the next two years, and spectrum related payments of about Rs 120 billion in the next 12 months. Vodafone Idea could look to cut back on Capex / Opex, and may streamline its operations to fewer service areas vs 22 at present.
Jio is likely to win a higher share of Vodafone Idea’s churned data customers due to a wider network footprint. Airtel could benefit from both data customers and feature phone users, given most of Vodafone Idea’s existing 2G customers are unlikely to buy JioPhone to be able to use Jio’s services.
Vodafone Idea will be free cash flow negative for the foreseeable future, with net-debt-to-EBITDA at about 11x even in FY21. This is likely to constrain the company’s ability to make network investments in line with Airtel, and Vodafone Idea’s high-end customer base could be at risk.
Vodafone Idea is likely to fall to third place in overall market share with between 22 to 24 percent of service revenue, Chris Lane and Samuel Chen, analysts at Bernstein, said in their latest research report.
Vodafone Idea is likely to chew through INR 208 billion in cash over the next two years. This excludes any participation in new spectrum auctions. Vodafone Idea would end the period with pro-forma forecast EBITDA of between INR 96 to 126 billion and net loss of between INR 92 billion and 73 billion.
