The Rise and Fall of Vodafone Idea
Corporate bankruptcies may be serious ordeals for promoters, shareholders and lenders, but the realism they cast over ordinary people who grew up alongside the company and watched it fall eventually, is another story.
Perhaps that’s one way to describe the feelings of the existing 270 million+ subscribers of Vodafone Idea (Vi) even as the operator faces an imminent financial and existential crisis.
With gross debts mounting over ₹1.6trn ($22.1bn), continuing stock erosion and rising calls for divestment and bailouts from promoters and executives, Vi’s struggle for survival gets tougher with each passing day.
Yesterday, however, the company may have found some temporary relief with the undoing of the infamous retrospective taxation law that had added to its woes. Not only did the Government withdraw its outstanding retrospective tax claims against Vi (amounting to ₹22,100cr ($2.9bn)) and 17 other entities, it also agreed to refund close to ₹8,130cr ($1bn) (of which a lion’s share would go to Cairn) which it had collected to enforce such levies.
But how far will these refunds help with Vi’s present financial distress? And will the tax withdrawals have any substantial impacts in managing Vi’s ongoing debt crisis?
What Went Wrong?
Indian telecom sector has seen some massive strides in the last decade. There were major overhauls like the 4G rollout, increased smartphone penetration and Jio’s 2016 entry followed by its subsequent market takeover. And then there were some pushbacks, primarily for the traditional operators, in the form of spectrum allocation changes, Jio’s predatory pricing, the AGR ruling etc.
While Bharti Airtel managed to hold on and bootstrap its position, the same wasn’t true for Vodafone. It made attempts to take on the Jio juggernaut by merging with Idea Cellular. In fact, in 2018, Vi was India’s largest telecom operator with over 400 million subscribers, close to a third of whom have now left.
Why Couldn’t It Retain Subscribers?
One. Delay in tech adaptation. With the imminent 4G transition, all existing telcos were outperformed by Jio’s instantly available 4G infrastructure. Vi still used conventional technology for voice calls while Jio was deploying VoLTE (voice over LTE) from the beginning.
Two. Expense crunch. As Jio bundled its free calls with free 4G data packs, Vi couldn’t parallel its services immediately without taking a hit on operating expenses. The network which once took pride in its qualitative services and superior offerings was now faced with operational inefficiencies — multiple outages, frequent call drops, slow data transfers and poor coverage, partly due to the not-so-smooth integration of Vodafone and Idea Cellular’s networks.
As a result, subscribers fled, costs kept piling in network integration operations, working capital reduced, profits narrowed and debts mounted. It was a cyclical mismanagement, to say the least. But this wasn’t the end of it.
Three. The Supreme Court’s verdict on outstanding AGR dues owed by telcos nailed Vi’s coffers even further. Vi’s dues were the highest among all companies. Added to that was a tariff war and expensive spectrum which decimated the company’s financials beyond recovery.
To be fair, problems like high operating costs and non-existent profits weren’t exclusive to Vi. Airtel decided to tackle this problem by focusing on increasing its Average Revenue Per User (ARPU) rather than worrying about customer retention.
That is what the company still maintains for the unit economics to check out. But with the need (and insistence) for ARPU to be in the ₹200+ range (vs. ₹146 which it achieved as of Q1), it appears that there is an industry-wide upward re-rating in the offing. Airtel also equipped itself with the advantage of technological superiority, which subscribers prefer more than cheaper but beat-down services. (By 2019, Airtel’s average download speed was 8.7 Mbps ahead of Jio’s 6.3 Mbps. Both Vodafone and Idea lay far behind.)
What’s the Terrain Today?
For starters, lenders of Vi are walking a tightrope. Although they haven’t rejected the idea of debt restructuring, especially with heavyweight promoter names like Birla in the fray, the banks insist on “seeing money on the table”. But that sight is nowhere in the picture, especially after Vodafone Global’s CEO dismissed any possibility of fresh equity infusion.
IDFC First Bank and Yes Bank (again?!) stand to lose the most in the event of Vi’s collapse (SBI has the highest exposure but it equals only 0.43% of its loan book). A large part of banks’ exposure to Vi is in the form of non fund-based guarantees and not term loans. This means the company’s dues (e.g. Spectrum, AGR, regulatory fees) far outweigh its outstanding loans. This could be another reason why lenders aren’t looking to gain anything through debt recasts.
A growing number of Vi’s vendors and business partners are getting increasingly impatient with the payment of dues. The Government is facing louder calls for intervention to save the cash-strapped telco, which has interestingly led to reports of a possible “relief package for the telecom sector”.
Speaking of appeals, it is worth mentioning the news of KM Birla’s letter offering to step down from management, which wiped out Vi stocks even further. What’s interesting to note here is that Aditya Birla Group’s present-day indebtedness to the banks stands at ₹1.94Lcr ($26.2bn) (the bulk of which is attributed to Vi).
So what happens to the bank loans of other group companies (Grasim, Hindalco, UltraTech etc.) if Vi turns insolvent? Or perhaps, the hurried exit of KM Birla from Vi was an attempt to distance from the telco and ring fence his other businesses?
FYI: As of today, Vi has NOT defaulted on bank payments and hence it is not a stressed asset yet. In fact, a growing number of AMCs are betting on the company’s revival which has thrown up some interesting trends.
Redeem or Perish?
A large portion of refunds from the Government owed from the retrospective tax cases is expected to go to Cairn, and not Vodafone, so there isn’t much of a cashflow relief. It is clear that the Government also doesn’t wish to establish precedent by rescuing Vi when it didn’t do so for Aircel or RCom.
Although details of the rumoured “relief package for the telecom sector” is yet unknown, perhaps the timeline and payment of AGR dues could merit a revisit (AGR EMIs alone could bankrupt Vi). There are rumours around a possible Government bailout with BSNL, seeing as it is the only entity positioned to acquire Vi. But that would play foul with the Government’s increasing push towards privatisation.
The fact remains that without any viable monetisation, Vi will head towards insolvency. The Department of Telecommunication will lose AGR dues, lenders will be forced to write-off yet another massive loan and the sector will lose a prominent operator plus revenues, making it a duopoly between Jio and Airtel. Not only will it reduce competition but it may soon lead back into a high-tariff regime. There’s a reason why even the most developed telecom markets prefer to have a three-player dynamic.
Conversely, if the Government chose to intervene, it would be forced to make substantial concessions and give up revenues for a few fiscals likely across the board (meaning to all operators) in order to avoid accusations of bias.
Either way, the exchequer stands to lose heavily.
Perhaps the most effective solution is to find a balancing act. Appropriate interventions at the policy level that include reasonable moratorium on dues, resettling AGR liabilities and a floor pricing regime. But there is very limited latitude that the Centre has in making such determinations, especially with sell ratings for Vi on the rise and stock value nearing zero.
(Originally published August 7th 2021 in transfin.in)
