NEW DELHI: India’s private telecom services sector may be tumbling headlong into an effective duopoly with Bharti Airtel and Reliance Jio punching it out for the top spot, but it isn’t one yet.
Because Vodafone Idea (VIL), the third private player in the equation, has managed to get a grip on some crucial metrics over the past few quarters. But if it is to star in a proper comeback story, VIL needs capital. Urgently. It is this rather glaring lack of capital at a time when the company needs it by the spadeful, that seems to have spooked many investors. Following the declaration of its results for the financial year and the quarter ended March 31, 2021 on Wednesday, its stock lost nearly a fifth of its value (18.5%) over the next two sessions, closing Friday at Rs 8.8 per share.
The fourth quarter’s results, though, were largely in line with expectations. Revenue from operations fell by 11.75% compared to the previous quarter ended December 2020. It fell by 18.26% as compared to the corresponding quarter of the previous year. But this decline is largely attributable to the removal of the interconnect usage charges (IUC) system from January this year, a change that dented the top lines of all telecom services providers in the quarter.
VIL’s average revenue per user (ARPU) consequently came down to Rs 107 from Rs 121. Its net loss narrowed on a year-on-year basis from Rs 11,643.5 crore in Q4FY20 to Rs 7,022.8 crore in Q4FY21, but widened sequentially from Rs 4,532.1 crore in the quarter ended December 2020. But VIL has managed to stem losses in its gross subscriber base over the last two quarters of FY21 at around 2 million, compared to losses of 11.3 million and 8 million in the previous two. More importantly, it has also managed to add to the more lucrative 4G and overall data consumer userbase.
Large cash outflows
Nevertheless, its biggest problem remains cash. Or the lack of it. And on that front, commentary from analysts has not been encouraging. As of the end of March 31, 2021, its cash and cash equivalents stood at a meagre Rs 350.3 crore. Set against that is a gross debt of Rs 1.803 lakh crore as of March 31, 2021 — of which Rs 96,270 crore comprises deferred spectrum obligations and Rs 60,960 crore of AGR dues that it has to pay the Department of Telecommunications (DoT) over a ten-year timeframe. It also has debt worth Rs 23,080 crore from banks and financial institutions.
In the notes attached along with the results, VIL also says that “as a result of the rating downgrade, certain lenders (have) asked for increase ofinterest rates and additional margin money/security against existing facilities”, and that it “continues to be in discussion with the lenders for the next steps/waivers”.
Against this bleak backdrop, VIL has substantial payments coming due from December this year. Existing debt of Rs 8,045.4 crore and the next AGR instalment (Rs 9,000 crore) is payable by March 31, 2022; a spectrum payment installment of Rs 8,211.7 crore is payable by April 9, 2022; and bank guarantees worth Rs 7,039.9 crore are due to expire in the next twelve months. VIL also needs capital to invest in network expansion and upgrades.
According to analysts at Goldman Sachs, at its current earnings rate, “the company could have a Rs 23,400 crore cash shortfall until April 2022”. With its debt levels high and cash low, CLSA says that “it is headed for financial crisis when annual payments come due”.
Many pieces at play
From comments made by VIL’s top management, it is clear that the company is trying to mitigate the level of cash outflow confronting it. It had approached the Supreme Court in January this year to allow the DoT to “correct errors” in AGR demands, but the matter is yet to be heard. It has also written to the DoT over additional AGR demands that it contests and is “awaiting a response from DoT”.
In September last year, its Board had also approved a fund raise of Rs 25,000 crore, but it has not managed to close it yet. Speaking during a post-earnings analysts’ call, VIL CEO Ravinder Takkar said that the company did not need a Plan B if its funding plans fall through. “We have a plan… engaging with investors. We expect this to take place,” he said, adding that the company was confident that funding will take place in the next few weeks.
But there are many pieces in play, and VIL needs most of them to fall into place to reach a more secure space. As laid down in the notes to its most recent financial results, “there exists material uncertainty” over its ability to continue as a going concern. This, it goes on to say, “is dependent on its ability to raise additional funds as required, successful negotiations with lenders on continued support, refinancing of debts, monetisation of certain assets, outcome of the modification application filed with the SC, and clarity (over) the next instalment amount, acceptance of its deferment request by DoT, and generation of cash flow from operations that it needs to settle or renew its liabilities or guarantees as they fall due”.
In its research note, CLSA says that in the face of VIL’s potential cash outgo, a review of AGR and tariff hikes are inevitable. If not, “the sector is headed towards a duopoly”.