THE BRIEF: Vodafone Idea’s long road to recovery

Vodafone Idea Ltd. (VIL) — the unified telecom entity formed in August 2018 between Vodafone Group plc and Kumar Mangalam Birla’s Idea Cellular Ltd.,—has had a despairing journey and recorded a cumulative loss of around ₹1.33 lakh crore over the last three fiscals. In the 2021 Fortune 500 listing of India’s largest companies, Vodafone Idea notched the highest losses at ₹44,233 crore. It has had a string of problems over the years, starting with the retrospective taxation case over the 2007 acquisition of a controlling stake in Hutchison Essar’s Indian assets internationally, the verdict over the repayment of adjusted gross revenue (AGR) dues and the slow roll-out of 4G services.

The waves of disruption forced the new CEO of Vodafone Group Plc, Nick Read, to announce that the company’s India unit could be headed for liquidation. Though he retracted the statement, Birla offered to hand over his 27% stake in the telecom company to government in August 2021.

It’s only after the government announced a raft of measures in September 2021 aimed primarily at keeping beleaguered telecom service providers afloat, that the storm seems to have calmed. VIL is now back on a slow path to recovery. The biggest measure was a four-year moratorium on AGR dues from October 2021 to September 2025. Both VIL and Bharti Airtel have opted for the moratorium. It offered VIL significant cash flow relief as it would be able to defer the cumulative payout of over ₹1 lakh crore over the next four years. The Department of Telecommunications (DoT) also released bank guarantees of around ₹2,500 crore deposited as licence fee and spectrum usage charges by VIL, as part of the reform package. More should be released over time. With more cash in hand as the payment has been staggered, VIL will be in a position to invest more in beefing up the network.

The promoters huddled up to reciprocate to government support. According to sources, both Vodafone and Birla group are now looking to infuse capital to turn around the telco, which is gearing up to launch 5G services around the same time as Reliance Jio and Bharti Airtel. As things stand, the government plans to auction spectrum for 5G services somewhere around July 2022. Much will, however, depend on the base price of the spectrum put up for auction.

The capital infusion is likely to materialise by March 2022 and will soon be followed by raising of equity and debt, say bankers in the know. “The VIL management has been in talks with investors and banks over the last couple of years to raise equity and debt capital. However, none of them was willing to bet on VIL’s turnaround. But there is light at the end of the tunnel now,” says an official with SBI.

Meanwhile, parent Vodafone has filed an application for settlement of ₹20,100-crore retrospective tax dispute with the Indian government. The British telecom giant’s tussle began when it acquired a controlling stake in Hutchison Essar in a $11.2-billion deal executed overseas. Vodafone Group owns 44.39% stake in India’s third-largest telecom service provider.

The Resolution of the retrospective tax issue is a huge confidence booster. VIL management, under MD and CEO Ravinder Takkar, has been firefighting all these years to keep the telco alive. They had limited financial resources to counter the onslaught of Jio and Airtel. From 2023, the Indian telecom game is once again expected to undergo a change as operators start launching 5G services. VIL needs to power the cash flow for capital requirements.

With this in mind, VIL hiked tariffs for prepaid users by 20-25%. VIL’s ARPU at ₹109 was 40% lower than that of Airtel. The hike should result in VIL’s ARPU increasing to ₹128, according to a Motilal Oswal report. The tariff hike is expected to improve cash flows as well since EBITDA [earnings before interest, taxes, depreciation, and amortisation] will increase. However, the continued market share loss and subscriber churn could potentially derail the cash generation quite like what happened when tariffs were last hiked in December 2019.

While Airtel was the first to hike tariffs, VIL followed suit and so did Reliance Jio. Across the industry, the aim is to achieve a higher ARPU [average revenue per user]. With the lowest prepaid plan at ₹99 [with 200MB of data for 28 days], against the earlier low of ₹79, “The new plans will start the process of increasing ARPU and help address financial stress,” the company said after announcing the new tariffs in November.

“Vodafone Idea has a loyal postpaid customer base. Despite the downs, VIL had 269 million subscribers as of October 2021. The telco will have to cash in on the customer base with best-in-class services,” says an executive with a rival telecom firm.

VIL has a debt of ₹1.9 lakh crore, including ₹1.68 lakh crore owed to the government as AGR and spectrum fee and ₹23,400 crore of institutional debt. In fact, incumbent telcos, including Bharti Airtel, which were traditionally generating business from voice have groped in the dark to play the data game with Jio. Till 2016, voice accounted for 70% of the revenues of incumbents. That went for a toss when Jio launched with free voice services. Suddenly, it became a data game, something which the incumbents were not prepared for initially, and which also meant greater capital expenditure.

With voice revenues becoming almost negligible, it has become imperative for incumbents to upgrade their network for data, which comes at a cost.

The combination of Vodafone and Idea Cellular has been a double-powered engine of technology and financial resources. The €37.1-billion Vodafone is among the world’s largest telecom companies present across Europe and Africa with joint ventures in Asia. Vodafone has already launched 5G across European cities. It first launched 5G in 2019, and rolled out advanced services across 125 locations in the UK and around 250 locations in Germany, Italy, Spain and Ireland.

In India, VIL has been conducting 5G trials for some time now. It has developed a wide range of 5G use cases, through partnerships with Ericsson and Nokia. To keep its customer base engaged, it plans to launch services related to gaming, education, skilling and health. All these propositions will help enhance VIL’s offering to the digital community.

The Aditya Birla Group, which is present across cement, non-ferrous metals and retail businesses, generated revenues of $48.3 billion in FY21. The group, which operates in 36 countries, has 50% of its revenue coming from overseas.