Vodafone Idea’s (VIL’s) fate hangs in balance with UK parent Vodafone Plc indicating that it has no plans to infuse funds into the ailing Indian venture. This, according to analysts, has again raised a question mark on the company’s survival once the government’s moratorium ends in FY26.
While announcing its FY23 earnings, Vodafone Plc said that the group’s carrying value of investment in VIL is zero. The group is recording no further losses related to VIL, it said, adding that the company is still in need of additional liquidity and plans to raise funds going forward.
Also read: Marketing, supply chain ‘main weakness’ in cross-border trade: Amazon Seller Report
“There are significant uncertainties in relation to VIL’s ability to make payments in relation to any remaining liabilities covered by the mechanism and no further cash payments are considered probable from the group as at March 31, 2023,” Vodafone Plc said.
In 2019, Vodafone Plc had written off the book value of over `17,000 crore investment in VIL. However, last year, it invested Rs 3,375 crore in VIL through its entities, by selling a partial stake in Indus Towers.
When the government converted VIL’s interest dues worth Rs 16,133 crore into equity in February, it was after the assurance by the promoters that they will bring in fresh investments. Such hopes had brightened when recently Aditya Birla Group chairman Kumar Mangalam Birla rejoined the company’s board.
However, Vodafone Plc’s statement now has again dashed hopes of any significant fund infusion by the promoters. “If promoters’ don’t infuse significant funds, will any investor do, is the question,” said an analyst.
While Vodafone Plc holds a 32% stake in the company, Aditya Birla group holds 18% and the government is the single largest stakeholder with 33.4%.
The company needs to service bank debt of around Rs 8,000 crore by December-end and also meet its minimum obligation to rollout 5G.
Analysts believe that it is not just about a one-time fundraise of Rs 10,000-15,000 crore, it is a long-term survival game. “At a time when Airtel and Jio are doing a capex of around Rs 30,000 crore, VIL’s capex of around Rs 4,000 crore is too less. Besides, without substantial fundraise, VIL’s cash shortfall will also increase,” a Mumbai-based analyst said.
Also read: Appeal against CCI fines only after depositing 25%
“Vodafone Idea may see cash shortfall of Rs 5,500 crore in FY24 (expected) and would require tariff hike/fund raise to survive,” Kotak Institutional Equities said.
The company currently has an operating cash flow or cash Ebitda (earnings before interest, taxes, depreciation and amortisation) run rate of around Rs 10,000 crore. According to Goldman Sachs estimates, the company’s free cash flow at the end of the financial year ended March (FY23) is estimated to be only Rs 2,600 crore.
“For the company’s competitive positioning to improve, we believe Vodafone Idea will require a substantial amount of capital raise, and/or a tariff increase; we estimate Vodafone Idea’s Ebitda will have to rise 5.5x vs current levels, or Arpu by 2.4x (to Rs 356), for the company to be free cashflow-neutral starting FY27,” Goldman Sachs has said.
The telecom operator is currently operating on the back of government’s moratorium on past adjusted gross revenue (AGR) and spectrum-related dues. However, once the moratorium ends in September 2025, the company’s annual instalments for spectrum and AGR dues would come to around Rs 43,000 crore. Based on the company’s cash Ebitda, VIL is expected to have a gap of Rs 30,000 crore, according to analysts.
For the ailing telecom player, a major expense is the finance cost, which is the interest cost incurred on funds borrowed. The company’s annual finance cost of Rs 24,000 crore is over two times the operating cash flow it generates, meaning that if there was no moratorium on government dues, the company would have had to shut shop.
Most of the debt owed by VIL is to the government. Given the future cash flow constraints in the light of increasing competition, analysts believe that the government would have to go for a second round of equity conversion.
“Cash flow and debt issues would worsen once the moratorium on regulatory payment ends. The company would need frequent (but required) equity infusions, with potential dilution to the shareholders,” Credit Suisse has noted.
“…we assume in the long term that a part of outstanding debt on spectrum and AGR will also be equitised by the government,” JP Morgan has maintained.
At the end of the October-December quarter, Vodafone Idea’s gross debt (excluding lease liabilities and including interest accrued but not due) rose to Rs 2.23 trillion, comprising deferred spectrum payment obligations of Rs 1.39 trillion, AGR liabilities of Rs 69,910 crore that are due to the government, and debt from banks and financial institutions of Rs 13,190 crore.
VIL is scheduled to report its earnings for the January-March quarter on Thursday.
Analysts expect the company to witness a fall in revenue sequentially. Losses for the quarter are seen at Rs 8,104 crore, higher than Rs 7,990 crore in the October-December quarter, according to average estimates of four brokerage houses.
