Vodafone Idea FPO, future funding plans to ensure India remains strong three-

private telecom market: Analysts

Analysts also believe that Vodafone Idea may benefit from being a late entrant
in the 5G market, learning from its bigger rivals that have already rolled out
pan-India 5G networks
DANISH KHAN APRIL 23, 2024 / 05:00 PM IST
Vodafone Idea’s follow-on public offer (FPO) was subscribed 6.36 times by
April 22, the final day of bidding, with investors bidding for 8,011.8 crore
equity shares.
Vodafone Idea’s follow-on public offer (FPO) was subscribed 6.36 times by
April 22, the final day of bidding, with investors bidding for 8,011.8 crore
equity shares.
Vodafone Idea’s fully subscribed Rs 18,000 crore follow-on public offer (FPO)
and other fund-raising plans will give the telecom operator enough firepower to
compete with Reliance Jio and Bharti Airtel and ensure that India remains a
three-private telco market, a number of analysts said.
They added that the telco’s focus on its planned capex for 4G expansion and 5G
rollout will help it arrest subscriber churn and ring-fence premium, high-paying
customers in priority markets.
Analysts also believe that Vodafone Idea may even benefit from being a late
entrant in the 5G market, learning from its bigger rivals that have already rolled
out pan-India 5G networks.
“The fundraise via FPO, along with other fundraising plans in the pipeline, will
give Vi enough firepower to compete with Jio and Airtel in the short to medium
term. Thus, this will allow the Indian mobile market to continue being a 3-
player market, which is quite critical from a consumer perspective to ensure
competitive pricing as well as to continue incentivising telcos to innovate their
service,” Ashwinder Sethi, a principal at consulting and analyst firm Analysys
Mason told Moneycontrol.
Vodafone Idea’s follow-on public offer (FPO) was subscribed 6.36 times by
April 22, the final day of bidding, with investors bidding for 8,011.8 crore
equity shares. The country's third-largest telecom operator has offered 1,260
crore shares in the Rs 18,000-crore FPO, the largest such offering in the
country. This move is part of a larger strategy to gather Rs 45,000 crore through
a combination of debt and equity.
Mahesh Uppal, founder of ComFirst Consulting, said maintaining a competitive
market is “undeniably” important. The government has also repeatedly
expressed its stance against a duopoly or concentrated market.
“No government would like the narrative and optics of a company as large and
high-profile as VIL crashing, whose subscriber base is over twice that of BSNL
and has roughly 22 crore subscribers. VIL is here to stay,” Uppal said.
In a note, Ambit Capital said that the FPO, a part of the debt-laden telecom
operator's broader plan to raise Rs 45,000 crore through debt and equity, may
help it challenge the current near-duopoly in the sector.
Ambit Capital added that if Vodafone Idea uses the funds effectively to enhance
its competitiveness, it could increase its share price and cash flow generation.
"With improved financial health, Vodafone Idea may have the option to either
pay off its spectrum and AGR dues or negotiate with the government to convert
unpaid dues into equity at prevailing share prices. This strategic decision would
depend on VI's assessment of its financial strength and the most beneficial
approach for its long-term sustainability.”
Analysts at Kotak Institutional Equities also predict Vodafone Idea's fundraising
may boost its short-term prospects. However, they don't see any significant gain
in market share or relief from potential large equity dilution.
They warn that the Government of India's stake could surpass 80 percent,
limiting the potential gains for minority investors.
The Department of Telecommunications (DoT) also believes the country’s
telecom market structure is in good shape, with Vodafone Idea firming up plans
to expand its 4G and 5G networks. “The structure of the market looks good,”
Neeraj Mittal, DoT secretary, told Moneycontrol in an interaction on April 19.
Vodafone Idea's Chief Executive Akshaya Moondra, on April 17, told
Moneycontrol that the telco’s focus is to expand its 4G coverage to match the
competition. “We believe we have been a very competitive player in the past.
With investments coming in, there is no reason why we will not be competitive
going forward and participate in the growth story,” Moondra said, adding that
4G expansion is the telco’s topmost priority.
Interview: Vodafone Idea will engage with lenders more seriously once FPO
funding is in, says CEO
Moondra said the plan was to provide good quality 4G coverage to arrest
subscriber churn. He claimed that 5G was not the reason behind the net loss of
subscribers. “The lack of 4G coverage, which is significant, is the reason for the
loss of subscribers.”
Of the total FPO proceeds, Vodafone Idea has proposed using Rs 12,750 crore
to purchase equipment for expanding its network infrastructure by setting up
new 4G sites, expanding the capacity of existing 4G sites, and creating new 5G
sites. As per the RHP, it will spend Rs 5,720 crore of the Rs 12,750 crore
earmarked for network expansion on setting up its 5G network.
“Vi may want to focus the network investments on a subset of circles where
they are performing well (Revenue Market Share greater than 15 or 20%) as
well as focus first on retaining premium, high-ARPU customers,” Sethi said.

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.