Will Vodafone Idea Ltd survive the test of time and competition?

“India is the second largest telecom market and the largest data consumer, globally. With 1.2 billion Indians accessing voice and data services at the world’s lowest tariffs…,” said Kumar Mangalam Birla, the Chairman of Vodafone Idea Ltd (VIL), speaking on Monday (September 7) morning after announcing the completion of what he called “the world’s largest integration in the telecom space”.

Birla’s words express the pain of operating in a telecom market which has great promise, but is threatened by cut-throat competition and a potential duopoly, which may knock out one of three telcos operating in the Indian market today.

Vodafone Idea Ltd unveiled a new identity on Monday (September 7) as it looks forward to rediscover itself post the Supreme Court’s ruling on past statutory dues. In fact, Birla’s Idea Cellular and British telecom major Vodafone’s India business had merged to create ‘VIL’ two years back, but nothing in what either Kumar Mangalam Birla or Vodafone Group CEO Nick Read said today gave any indication of the troubles that assail VIL since its inception. These troubles have often lead sector experts to question the viability of the company.

In fact, dire predictions about India’s telecom market turning into a duopoly and VIL exiting the market have been made several times in the last few months, though it remains to be seen if these doomsday predictions will actually come true.

The VIL has managed to pull through till now despite the odds stacked heavily against it and could play along in the near future too.

Hope still left for VIL?

For one, the Supreme Court verdict, which has allowed telecom operators 10 years time to finish paying their Adjusted Gross Revenue (AGR) dues, could help VIL since staggered payment offers time to generate funds. Two, the government may not want a duopoly and may actually facilitate VIL’s survival. So if VIL plays its cards right, it gets the much-needed equity infusion and is also able to significantly raise tariffs in the coming months, which may help the alliance to just survive in one of the world’s most competitive telecom markets.

What hyper competition has done to the market is evident from rapid consolidation: there were nearly a dozen players not long ago but now it is a three-legged race (besides one state owned telco), due to regulatory issues and heightened competitiveness. It is the newest player on the block, Reliance Jio Infocomm (RJio) that has usurped the incumbents, becoming the undisputed revenue market leader with more than 40% share.

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RJIo has achieved this position in just four years through relentless freebies and offering data at unheard-of prices. Voice services have anyway been made free for life by RJio since its launch in 2016, forcing others to follow suit. Bharti Airtel and VIL are thus relegated to the second and third positions respectively due to the aggression shown by RJio and the two incumbents have been playing catch up in the last several months. As per latest data put out by sector regulator TRAI, RJio (34.33%) accounted nearly every third subscriber while Bharti (27.28%) and VIL (27.08%) accounted for a fourth each till May 31.

In this scenario, not only did VIL’s Rs 25,460 crore loss in Q1FY21 seem to further dampen its prospects of continuing in the market, but operational metrics too did not generate any confidence. VIL gave a statement after the results stating that while subscriber churn (number of subscribers leaving the network) reduced to an all-time low of 2% from 3.3% in the immediately preceding quarter, gross additions were severely impacted. So more than 11 million subscribers deserted VIL during the quarter and the total subscriber base declined to 279.8 million (291.1 million in Q4FY20). ARPU (average revenue per user) also fell to Rs 114 from Rs 121 in the immediate previous quarter.

Given these dismal statistics, are sceptics right in predicting VIL’s downfall? Well, there is hope yet.

Supreme Court grants relief in paying dues

The apex court has allowed telcos to pay 10% of total past dues upfront and remaining 90% can be paid in the next 10 years starting 2022-23. The estimated liability for VIL could be Rs 5,000 crore by FY22 and then an annual payment of Rs 7,000-8,000 crore for the next decade. Analysts at ICICI Direct pointed out that while all the telecom players will need to raise tariffs to pay AGR dues, VIL has already been plagued by cash burns and may find it “difficult to meet the demand of annuity payment of Rs 8,391 crore from FY22 end onwards. Apart from tariff hike (to the tune of ~92%), it would also need immediate capital infusion to bridge the cash gap.” Will VIL be able to nearly double tariffs, in a hyper competitive market, to fund the AGR outgo?

Related news: Vodafone Idea in talks with Amazon, Verizon to sell significant stake

Fund infusion

Last week, the VIL board approved a proposal to raise up to Rs 25,000 crore via debt and equity. This decision comes just after analysts highlighted an annualised “cash gap” of about Rs 6,000 crore for VIL. Analysts at ICICI have also pointed out that from FY23 onwards, VIL would also have to resume spectrum payments (which are currently on a moratorium) of Rs 6,000 crore besides the AGR annuity of Rs 8,391 crore. Even if the company manages to save Rs 4,000 crore due to cost rationalisation, “there would a cash gap of Rs 26,500 crore”.

This, when the underlying assumption is that there is no further subscriber loss. The analysts have said that they expect VIL’s “payout ability (as well as going concern promise) to be a near impossible feat unless there is an immediate fund infusion and a tariff hike coupled with customer churn arrest.” Now that the board of directors of VIL has approved a massive funds’ infusion plan, perhaps M&A activity could secure its near-term future. Several marquee names, including Amazon and Verizon, have been doing the rounds as potential investors.

Government nudge

Above all, a benign regulatory environment could well keep VIL alive and prevent a duopoly. Already, a partial victory on the AGR issue has provided some respite to the company. Then, sector regulator TRAI is considering whether to impose a floor price for tariff – a point below which no telco would be able to pull down tariff. This would help all players, but VIL in particular, since it insulates the telco from further price shocks by competition. Earlier, the company had sought a substantial reduction in licence fee and waiver of spectrum usage charges to stay afloat.