The Brief: Will The Real Owner Of Vodafone Idea Please Stand Up!

IT WAS in April 2021 that Bharti Airtel chairman Sunil Mittal commented that the telecom industry was a two-and-half player market with one operator increasingly becoming a “question mark”. It’s been two years since and Vodafone Idea — the “half” player Mittal was hinting at — is now down to a near quarter of a player! While Bharti Airtel’s revenue in FY23 was ₹1.39 lakh crore with a profit of ₹8,346 crore, Vodafone Idea (Vi) managed ₹42,177 crore with a loss of ₹29,301 crore. In comparison, disruptor Reliance Jio is sitting pretty with ₹90,786 crore in topline and ₹18,207 crore in profit.

With every passing quarter, the Indian telecom market is hastening its journey towards duopoly. As of February 2023, Jio maintained its supremacy with 427.1 million subscribers compared with Airtel’s 369.8 million. In contrast, Vi’s user base has shrunk to 237.9 million. Together, Airtel and Jio now control 69.78% of the country’s subscriber base of 1,141.9 million. Ever since the ill-fated merger in 2018, Vi has been ceding ground to rivals amid a record consecutive 18-quarter loss even as its debt has piled up to over ₹2.2 lakh crore. The irony is, post-merger, Vi had emerged as the largest operator with 408 million subscribers and over 32% revenue market share. The rapid decline in user base and the inability to increase the average revenue per user (ARPU) have resulted in a negative net worth of ₹84,405 crore. The latest capital infusion — conversion of the interest on adjusted gross revenue (AGR) dues into equity by the Centre — has not translated into tangible cash for Vi. On the contrary, the conversion has further bloated its capital base.

Telecom Guzzles Cash

Since 2018, Vi’s equity capital has expanded 11 times from ₹4,360 crore to ₹48,680 crore. It will expand further in case tower infra provider, ATC, chooses to convert its ₹1,600 crore optionally convertible debentures. Incidentally, no other Aditya Birla Group business has a capital base as large as Vi. The combined capital base of the group’s prominent businesses was ₹13,531 crore (FY22) and, if one were to consider just the proportionate stake of the Birla family, it will reduce further!

Though the Birlas (18%) and Vodafone Plc (32%) collectively own 50.36% in Vi, it is the government which has a lot more at stake — given its ₹2.2 lakh crore dues. Vodafone Plc, which ousted its CEO Nick Read in December 2022, had thrown in the towel in 2019 by writing off the value of its Indian investment. While the U.K. partner is in no mood to put in any more capital, Kumar Mangalam Birla, too, has his priorities sorted out. Telecom is, clearly, not one of them — at least not in its current state. While too much is being made of the 55-year-old’s re-entry into Vi’s board — nearly two years after stepping down as the chairman — the position of a non-executive director indicates a not-so hands-on approach in the company’s affairs. In fact, even as the Aditya Birla Group is bullish about financial services, flagship Grasim, which owns 10.91% in Vi, too, has set its sights on a new venture — paints — with a ₹10,000-crore outlay till FY25.

While the Centre has only converted the interest (₹16,133 crore) accrued on the AGR dues into 33.14% equity stake, it expects the promoters to bring in more equity or raise debt to prove their commitment. In the past, the company has tried to sell its stake to PE investors, but no strategic or financial partner will have the stomach to enter a business where competitive intensity is rising by the day in a market with the lowest ARPU. A look at Trai’s data gives a sense of Jio’s disruption — the industry ARPU has moved from ₹98 (end-2012) to ₹137.31 (September 2022), an increase of just 33% over a decade!

The current operators are managing the show by either tweaking around the validity period of post- or pre-paid plans, or by cutting down on data without changing the pack value, thus, effectively, increasing the tariff. But at $1.68, India’s ARPU is still among the lowest globally. Additionally, the sustained need for higher capex to upgrade networks and invest in emerging technologies (5G/6G) is enough to put off investors seeking higher returns in a rising interest rate environment. That telecom is a tough business, especially in India, can be gauged from Bharti Airtel’s meagre return on equity of 6.78% (FY22), despite its superior positioning. Though Mittal has been harping for years the need for a substantial tariff hike, it looks a distant dream given that Jio is still throwing its weight around. In a two-way fight, it will be wishful thinking from the government to expect Vi’s promoters to pump in more money.

The Centre, despite its sizeable stake in Vi, wants to be seen as a public shareholder. The government has already incurred a loss of ₹5,582 crore on its holding in Vi as the stock was trading at ₹7.05 (May 17), 34.60% lower than its issue price of ₹10. If it is throwing good money after bad in the telecom business with a ₹1.64-lakh-crore fund infusion for the loss-making BSNL, it would make eminent sense to weigh a merger with Vi which is strong in 4G unlike BSNL. Just as the government took a decisive call in the case of Air India despite its accumulated losses and legacy workforce, there is no reason why it cannot do so with BSNL. A report by Deutsche Bank, too, had made a strong case for the merger. “…the only viable solution is for the government to recapitalise Vi by converting its debt into equity, preferably, while merging it with BSNL...,” the report had stated. Though the telecom ministry is categorical about not wanting to take over Vi or consider a merger, it will be foolhardy to believe that Vi will find its way out of the woods on its own.

The management at Vi can engage in conversations with potential investors but it is the real “beneficial owner”— the Centre — which needs to walk the talk of ensuring a strong three-player market. Telecom minister Ashwini Vaishnaw would know the significance of “opportunity cost” as he not only has management experience — having led Siemens and GE Transportation — but was also an entrepreneur. While the bureaucracy can cite legal complications to a merger, the government can tweak regulations in its favour just like it did with LIC’s listing. Legalese is the least of all the challenges to a combination with BSNL. But given that general elections are due next year, the Centre wouldn’t want to be seen as selling family silver. Also, the question would be if Vodafone and Idea couldn’t make it through with a merger, what will change now? But the Centre has to take a chance.

Back from the brink, thus far Vi has been managing its cash flows by paying its dues to lenders even as it enjoys a four-year moratorium on its payment to the government. But bankers will not be too keen to lend any more money unless fresh equity comes in. Further, the National Company Law Appellate Tribunal had in 2021 ruled that spectrum, an intangible asset held by operators, cannot be transferred to a new buyer unless the Centre’s dues are cleared. This decision has dealt a blow to bankers dealing with the insolvency of RCom, Aircel and Videocon Telecommunications.

Of the ₹2.2 lakh crore dues, the government owns a lion’s share comprising deferred spectrum payment obligation of ₹1.39 lakh crore and AGR liability of ₹69,900 crore. Emkay Global has estimated that post the moratorium, Vi’s first payment towards spectrum dues will start from October 2025 and AGR dues from March 2026. When the moratorium ends in FY27, Vi will have to pay ₹9,100 crore a year as instalment towards AGR dues and ₹7,400 crore per annum arising from the deferment. For the spectrum dues, Vi will need to pay ₹14,800 crore per annum as instalment and an additional ₹10,000 crore as new instalment arising from the deferment. In short, the firm has to shell out, including the 5G spectrum dues, ₹43,100 crore a year from FY27. The brokerage firm estimates a funding shortfall of ₹25,000 crore in FY26 and ₹36,000 crore in FY27, which will need a tariff hike of 85% and 122%, respectively, to bridge the deficit. Will that be possible? Going by the historical trend, the probability of a duopoly is higher than an elevated industry ARPU.

Over the past five years, the government has recapitalised PSBs by infusing over ₹3.10 lakh crore. Barring a handful, all PSBs are a drain. Today, more than a strategic or financial investor, Vi needs a sensible exchequer on its side. Since the Centre has bestowed upon Birla the Padma Bhushan, as a reciprocal gesture, Birla could send a copy of Daniel Kanehman’s, Think Fast, Think Slow to the telecom ministry to dissipate any “delusional optimism” that it has about the future of Vi.