Vodafone Idea FPO: Applaud the endeavour, skip the ride

Updated - April 21, 2024 at 09:12 AM.

With complete uncertainty on how the debt overhang will be addressed, valuing
the shares of Vodafone Idea is a big exercise in speculation
By HARI VISWANATHBL RESEARCH BUREAU
The FPO funds raise is part of a total fund-raising plan of around ₹45,000 crore
As we had mentioned in our update on Vodafone Idea FPO in bl.portfolio last
week, a successful conclusion of the ₹18,000-crore FPO that opened on April
18, and closes on April 22, will ensure it survives comfortably for the next two
years at least. The next two years will be a phase when it will survive to fight
(later). However, when will it be in a position to fight to win? Read on to find
out.
The FPO funds raise is part of a total fund-raising plan of around ₹45,000 crore,
with balance ₹27,000 crore expected to be funded via debt. Statements from the
Central government post the FPO announcement clearly indicate its intentions
to ensure a viable pan-India third private player in the Indian telecom market.
Given that out of total debt of ₹2.30 lakh crore (including optionally convertible
debentures), 90 per cent is owed to the Centre, its statement of support means it
will not rock the business for the sake of encashing its dues. Hence the FPO
needs to be viewed from two different angles – what it means for the business
and what it means for the shareholders.
For the business
From over 400 million wireless subscribers and market share of around 35 per
cent at the time of merger of Vodafone India and Idea Cellular, in 2018,
Vodafone Idea’s subscriber count has declined to 215 million now, with market
share at 19.3 per cent. This decline was a consequence of company’s debt and
funding issues constraining its ability to invest in essential infrastructure and
marketing that was required to grow its 4G business.
This problem will get addressed with the FPO fund raise. Out of ₹18,000
crore, ₹12,750 crore will be invested for setting up and expansion of 4g/5g
sites, ₹2,175 crore to settle certain deferred payments dues to the DoT, and the
rest for general corporate purposes. The company management is confident that
the total fund raise will be sufficient to compete and grow its business over the
next two years. Further, its current spectrum holdings are adequate to grow its
4G business and sufficient to support migration of 4G subscribers to 5G over
the next few years..
Hence, operationally, the performance of Vodafone Idea can improve, going
forward. Management is also betting on improving ARPU driven by two factors
— increase in data subscribers as well as tariff increases. With 4G customers at
58 per cent of total wireless subscribers — it is at 70 per cent for Airtel’s India
business and 100 per cent for Reliance Jio — this provides scope for increase in
ARPU even without tariff increases, given the company’s new investments are
geared to enhancing its 4G customer base.
At present, ARPU for Vodafone Idea, at ₹145, is well below that of peers’
(Airtel’s at ₹208 and Reliance Jio at ₹182). The company has also highlighted
an interesting data point in its presentation — in the seven-year period from
September 2016 to September 2023, while average wireless data
consumed/subscriber/month increased by more than 8,000 per cent, voice
minute usage/subscriber/month increased by 160 per cent, blended mobile
ARPUs in India have increased only by 24 per cent. ARPUs in India are
amongst the lowest in the world. Management believes, given the value
proposition offered by telcos, there is a strong case for tariffs to increase from
here.
While management has a point here, it needs to be noted that how much the
tariffs can increase will depend on competitors’ willingness to raise prices as
well as other pressures that may surface. For example, when there was a mobile
tariff increase in 2019, the RBI had noted that it will add to inflation. Globally
and in India, inflation issues have not abated. Hence, with the government being
a significant shareholder in Vodafone Idea (33 per cent, pre-FPO) and largest
creditor, it may want to influence and ensure a balancing act between the need
for tariff increases and controlling inflation.
The company also plans to grow its b2b business offerings. However, the
revenue contribution from this segment does not appear to be significant at
present.
For the shareholders
In the bl.portfolio edition dated September 10, 2023, we had recommended that
investors sell the stock of Vodafone Idea given our view that there was not
much fundamental upside in the stock when it was trading at ₹10.50 then. The
mid-point of the FPO price band of ₹10-11 is exactly 10.50. While operationally
things will improve, we are not convinced that FPO price offers value for
shareholders for the following reasons:
At the FPO price, Vodafone Idea will have a trailing EV/EBITDA of 16.5
times, ranking it as the most expensive large mobile telecom player globally.
Even assuming a very optimistic 20 per cent CAGR in EBITDA over the next
two years, it trades at 11.3 times CY25 EBITDA.
Bharti Airtel, with a solid balance sheet and well-diversified business, trades at
12 times CY23 EBITDA and at 9.5 times CY25 EBITDA. Hence, even under
optimistic assumptions, the Vodafone Idea shares at ₹10-11 do not appear
attractive. Further, investors need to consider a few other overhangs that may
loom.
With trailing net debt/EBITDA at 14 times, with government support, debt
repayment is not a problem, but only for a while. Current deferred spectrum
payment obligations (DPO) liability stands at ₹1.3 lakh crore while AGR
liability is at ₹65,000 crore, accounting for bulk of the company’s debt. A heavy
repayment schedule will start towards the end of FY26. The FPO filing states
that around ₹29,073 will be payable in FY26 and ₹43,018/ year payable for
each FY from 2027 to 2031, towards DPO and AGR liability. To understand the
significance of this, compare this with consensus estimates of FY25 revenue for
Vodafone Idea at ₹47,000 crore.
It is clear the company cannot generate funds from operations or any asset sale
to repay government dues. In all probabilities the government will have to
support the company again by deferring DPO and AGR payment liabilities from
FY26 onwards or convert most of this debt into equity or optionally convertible
debt.
If this debt is converted into equity at the FPO price of ₹10, government will
end up owning around 80 per cent of the company. If this is converted into
equity at, let’s say, a price of ₹15/share, it will still end up with a high share of
around 75 per cent. With complete uncertainty on how the debt overhang will
be addressed, if converted into equity – at what price, implications if
government ends up owning a huge stake etc — valuing the shares of Vodafone
Idea is a big exercise in speculation.
Given these, we recommend that investors give the FPO a pass and wait and
watch for now. Borrowing a quote from Warren Buffett, we applaud the
endeavour (turning around the company), but prefer to skip the ride (for now).
Fighting to win appears few years away.