Equity delay left Vodafone Idea with fewer users and higher debt

16-mnth hold-up: User base down by a tenth, Ebitda margins squeezed, losses pile up

The more than 16 months of back and forth between the government and the promoters of Vodafone-Idea (Vi), before the latter agreed to convert part of its dues into equity last week, has had an adverse impact on the company.

The delay has cost Vi dearly in lost subscribers, rising subscriber churn, and a growing  debt burden, reducing Ebitda margins, and pushing up the losses on the balance sheet.

On September 15, 2021, the Cabinet had cleared a package for financially-stressed telecom firms in which the government offered them an option to convert part of the interest from deferred dues to equity.  

Vi chose the option.  Later, the government imposed a condition: the conversion would happen only if  the promoters of Vi — Birlas and Vodafone Group plc — made a reasonable commitment to put money into the company. The move was seen as reasonable by the government as Vi’s search for strategic investors and banks to raise Rs 25,000 crore had not fructified (it only brought in Rs 4,500 crore).

But despite several discussions, the promoters took an ambivalent stand on the matter. They made it clear that they would not invest in 5G. The Birlas even said that they were ready to sell their shares at a nominal cost to a new buyer. And Vodafone plc publicly stated it would not make any additional investment into the company.

But last week the Birlas relented after a meeting with communications minister Ashwini Vaishnaw. They have now agreed to bring in money with other partners and run the management of the telecom firm. However, sources say that they have not committed to a number. Government officials say that it is up to the Birlas to convince Vodafone plc, which has maintained a complete silence on the matter despite queries on their future course of action.     But in the process of the long delay in coming to an understanding with the government, Vi has lost 26.11 million subscribers — nearly one-tenth of the subscribers it had in November 2022, which stood at 243.79 million , as compared to September 2021 when it was 269.9 million , when the package was announced. The blended churn rate, a reflection of subscribers porting to other network service providers, has gone up from 2.9 per cent in FY22 to 4.3 per cent in FY23. In terms of financials, the company’s Ebitda margins have been squeezed by 2.5 percentage points in the same period, though overall average revenue per user (Arpu) is climbing up. What’s more, Vi’s losses have risen by 6.5 per cent from FY22 to hit Rs 7,595 crore in the September quarter of FY23.

The company’s debt has also increased by 13 per cent in the same quarter, hitting Rs 2.20 trillion in Q2 FY23, partly because it is buying 5G spectrum under deferred payment. In addition, the company’s cash balance over the same quarter has fallen from Rs 2,100 crore to just Rs 800 crore. While it has bought 5G spectrum in limited circles, unlike its competitors that are moving at full throttle and aiming to offer 5G services across the country, Vi has not even started rolling out the service anywhere.   

Clearly, for Vi, the agreement between the government and the Birlas is the beginning of a long and arduous journey to come back into the telecom sweepstakes, say experts. Despite falling subscriber numbers, its survival has been taken care of for the time being. To begin with, it will now be able to raise Rs 20,000 crore, thanks to the Birlas pitching in. Banks too will be willing to lend as they were waiting for the government to hold equity.  

But analysts say that Vi would require an estimated $9.5 billion in the next 4-5 years, and that number could go up to $12 billion if it makes an aggressive entry into 5G. 

For Vi, the difficult comeback into the telecom game has just begun.