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Vodafone Idea: Deteriorating hopes of survival


Will Vodafone Idea survive? Has been one of the most frequently asked questions since the Supreme Court’s AGR verdict a year ago. Recently, we wrote on what happens if the company shuts shop. Q1FY22 results, which were released on Saturday, reinforce the impending financial crisis at Vodafone Idea that will hurt the Government of India the most.

Vodafone Ideas latest quarter results in a nutshell

  • Continues to lose high-end subscribers and hence ARPU is falling too.
  • Debt swelled to ₹ 1.92 lakh crore – more than the market capitalisation of India’s largest pharma company (Sun Pharma)
  • Net worth stands negative at ₹ 45,541 crore – 2.5 times its market capitalisation
  • Biggest QoQ drop in EBITDA
  • Bank guarantees and dues worth ₹ 39,188 crore up for payment/renewal over the next 12 months

The telecom sector seems to be heading towards a duopoly. The financial performance reported by Vodafone Plc. and Aditya Birla Group controlled Vodafone Idea Ltd. at least say so.

It has now been over two and half years since the merger is completed. Yet, the merged entity has shown no signs of improvement in its financials. Despite undertaking two cost-saving initiatives which have resulted in quarterly savings of ₹ 2,800 crore (in Q1FY22), the company has reported its biggest drop in EBITDA.

In fact, its EBITDA – adjusted for Ind-AS and one-offs – is lower than these quarterly savings.

Vodafone Idea: Deteriorating hopes of survival

In the June ended quarter, the company continued to lose subscribers. Even its high-end users, i.e., 4G subscribers. This resulted in a drop in its average revenue per user. The reason behind customer losses is cash constraints. The company seems to have entered this vicious circle. Due to cash constraints, Vodafone Idea’s ability to invest in its network has been hampered which has resulted in a poor network. And, hence, the high churn rate.

Vodafone Idea: Deteriorating hopes of survival

The company yet again ended the quarter, with a net loss of ₹ 7,319 crore – partially aided by an exceptional gain of ₹ 178 crore. It appears that during the quarter, the company sold a leasehold land (probably due to cash crunch) which resulted in gains of ₹ 127 crore. The company has not been able to report profits since the completion of the merger.

In earlier quarters, the losses were also because of cut-throat competition from the newest telecom operator – Reliance Jio Infocomm Ltd. However, now the problem is with the company itself as its rival – Bharti Airtel Ltd. – has reported strong performance. Airtel’s performance has outperformed Vodafone Idea in all parameters.

Vodafone Idea: Deteriorating hopes of survival

Another alarming situation related to the company is the dues that will be coming up for payment. Needless to say, that the company is in no position to pay these dues. Now according to the company, over the next 12 months, it has to pay liabilities, which include debt, deferred spectrum obligation, AGR dues, and bank guarantees, worth ₹ 39,188 crore. Three-fifth of these dues are related to the Government of India.

Vodafone Idea: Deteriorating hopes of survival

What does it need?

To start off with ₹ 39,188 crore in cash. This could be either via equity and/or debt. However, the company has taken approval to raise only ₹ 25,000 crore. However, even if it gets ₹ 39,188 crore, the problems won’t stop. This fundraiser will only help the company to tide over the financial crisis.

To be sustainable over the longer term, it will need more.

In the last four quarters, the company earned a cash EBITDA (adjusted Ind-AS) of ₹ 7,600 crore. However, it would need close to ₹ 12,000-13,000 crore of cash EBITDA to meet its interest+principal debt obligations and capex requirements. Add to this another ₹ 16,000 crore for deferred spectrum obligations and AGR dues.

Even if we assume, that the government extends the moratorium on deferred spectrum liability by another couple of years and AGR liability reduces to ₹ 21,500 (self-assessed AGR dues). Then the cash EBITDA required in FY22 would be ₹ 15,000-16,000 crore (if AGR dues fall to ₹ 21,500 crore, then the annual AGR dues would be close to ₹ 13,000 crore).

That is still double of what the company earned in the last four quarters which in itself is a tall task.

However, this can be achieved only if there are tariff hikes, the company has been able to control its subscriber losses and the government provides additional relief measures in form of reduction in license fees and spectrum usage charges. All this is assuming that the moratorium is extended and the AGR dues which is now a ‘cast in stone’, changes.

Now, that’s a lot to ask. Even if it happens, Bharti Airtel would benefit a lot more than Vodafone Idea from the above-mentioned measures.

Bharti Airtel continues to remain in a sweet spot either Vodafone Idea survives or exits.

Other Suggested Readings:

What happens if Vodafone Idea goes bankrupt?

Can Vodafone Idea Survive Even With A Favourable AGR Case Outcome

Telecom Tariff Hike: Imminent, But When?

What 2021 Holds For The Telecom Sector

Indian Telecom Sector: Duopoly Or Hefty Tariff Hikes?

This article is for information only, and should not be considered as a recommendation to buy or sell any stocks. Stocks mentioned maybe part of Capitalmind Premium Model Portfolios

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