Exclusive | Vodafone Idea not banking on paying dues with equity, team to put business back on track

#AGR, #Spectrum Dues, #Telecom, #Vodafone-Idea, Vodafone Ide

Facade of Vodafone Idea Limited Corporate office (Source: ShutterStock)

Vodafone Idea is not in favour of using equity to pay the principal and interest it owes the government towards spectrum and AGR, people at the Aditya Birla Group with direct knowledge of the matter said. The option of paying dues in the form of equity “defeats the purpose of ownership,” the people said on condition of anonymity.

The debt-laden telecom company wants to put in place structural changes to take advantage of the telecom relief package announced on Wednesday by the government, which has offered a four-year moratorium on AGR and spectrum fees with effect from October 1, the people said.

A multi-pronged strategy is in the works to arrest the telco’s loss of market share and improve its financial health with the boost given to cash flows, the people said.

“It’s a relief from government dues but not from fierce competition in the telecom sector,” one of the people said.

The structural changes being contemplated by the company may include improvements in management, sharpening its competitive edge and upgrading from 2G to 4G network, the people said.

Vodafone Idea declined to comment in response to a query emailed to the company by Moneycontrol.

Upgrades loom as a daunting task

Vodafone Group Plc. and Idea Cellular announced a $23 billion merger in 2017 to create a telecom behemoth with a subscriber base of around 430 million. There has been a consistent drop in its subscriber base since the merger with the number of customers at 255 million at the end of the first quarter of the current financial year.

The average revenue per user (ARPU) ) dropped to Rs 104 in the first quarter from Rs 121 in the third quarter of the last financial year.

“Vodafone Idea needs an ARPU of close to Rs 150 to generate enough cash to sustain the business,” one of the people said.

In a tough tariff environment, the only avenue for the telco is to upgrade its network from second generation (2G) to fourth generation (4G). That will add a premium to the network and help lift the company’s ARPU.

Analysts point out that a network upgrade will require capital expenditure on infrastructure which the company has been finding difficult to finance given its burden of debt and payments it owes; Its cash generation ability has declined because of the erosion of its subscriber base.

In the first quarter of the current financial year, Vodafone Idea had net cash available of Rs 900 crore on its books. The company ended the quarter with Rs. 1.9 lakh crore of debt. It earned Rs 9,152 crore of revenue and posted a loss of Rs 7,319 crore.

Relief from principal payments on spectrum dues as well as the added AGR burden will save the company from additional debt burden for four years.

VI has AGR dues worth Rs 58,254 crore as assessed by the Department of Telecom. Its Rs 1.9 lakh crore debt pile includes spectrum obligations amounting to Rs 94,200 crore. Analysts estimate Vodafone Idea’s annual AGR dues at Rs 8,000 crore the annual spectrum dues at Rs 16,000 crore. All this can be a part of the moratorium but with the additional interest burden. Estimates suggest around Rs 2,,000 crore of finance charges to be added to Vodafone Idea’s annual interest payments.

Management and cultural integration

Group insiders told Moneycontrol that the biggest hurdle faced by the telco post the merger of Vodafone and Idea was cultural integration.

“It is divided by design” one person pointed out. Terms of the agreement at the time of merger suggest that Vodafone received the right to appoint the chief executive officer (CEO) and the Aditya Birla Group to nominate the chief financial officer at the telco.

The people cited above said a rethink on the management strategy is also part of the contemplated overhaul of the structure at Vodafone Idea to brace up for the intense competition in the sector.

“Despite stepping down as the chairman of Vodafone Idea, Kumar Mangalam Birla has shown commitment in the business by convincing the government for a relief package. Managing cultural integration to get a combined force to move ahead is critical,”  one observer tracking developments at the group said.

A change in the agreement between Vodafone and Aditya Birla Group to rework the management appointments can be an option if the latter is to put its might behind the company to ensure its survival, the people cited above said.

Equity fundraise crucial

Vodafone Idea had taken shareholder approval to raise Rs 25,000 crore but struggled to pull together the money.

“Equity investors in the past have burnt their fingers and will wait for some performance from the company before they can bet on it again in a changed telecom environment,” one person in the investor community said on condition of anonymity.

Vodafone and the Aditya Birla Group have stated several times that they will not infuse any additional funds in the cash guzzling company.

“Vodafone Plc may still continue this stance, considering the UK-based giant has written off its India investments, but it needs to be seen if ABG has a change of heart if business improves,” one of the people said.

5G a pipe dream?

Even if Vodafone Idea works on upgrading to 4G, the company is one generation behind its competitors, which are gearing up for 5G auctions. The company is expected to focus first on improving its financial health before looking at capital expenditure to boost growth.

While the government has provided a moratorium on payments, it has made the exercise revenue-neutral for the exchequer by levying interest on the money owed to it.

Vodafone Idea was also seeking a floor price on tariffs, but the government has left it for market forces to decide.

“It is a survival first approach for Vodafone Idea, bolstering the financial performance with a massive re-haul may be the need of the hour,” a telecom expert said.

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