Policy mess in Indian telecom market leaves Vodafone with no option but to exit

India’s telecom market is headed for another shakeup as Vodafone Idea Ltd (VIL) could well shut shop in the near future. British partner in VIL, Vodafone PLc, says Indian demands of past dues have made operations unsustainable.

At a press roundtable in London this week, Vodafone Plc CEO Nick Read said operations in India may be headed for liquidation unless the government relents and offers relief over these payments. The ultimatum comes after the recent Supreme Court judgement which makes Vodafone liable to pay upwards of ₹28,000 crore in past dues for license fees and other related levies.

Worrying trend

Why VIL’s probable exit should be a cause for worry for both, the government and India’s pampered telecom subscribers, is clear from these numbers: Roughly every third Indian mobile phone subscriber uses the VIL network. The company held over 32% share of subscribers till the end of August this year, as per TRAI data. So in the event of VIL shutting shop, only two large private players (except state owned BSNL) will be left in the race: Bharti Airtel and Reliance Jio Infocomm. It is obvious that with such rapid consolidation, there could be an equally rapid increase in tariffs, hurting subscribers. As of August, Bharti held 28% of subscriber share while RJio held nearly 30%.

A potential VIL exit would be embarrassing for the government since it will showcase weakening confidence of global investors in the India growth story. In fact, the Indian telecom sector has borne the brunt of poor policies and inept decision making by successive governments. There was a time not long ago when India had nearly a dozen telecom operators who were competing fiercely with each other to offer rock bottom call tariffs, keeping subscribers happy.

First, the 2G scandal and the subsequent cancellation of 122 telecom licenses by the SC changed the very dynamics of the market overnight, since many foreign operators were forced to exit India. Then, RJio entered the market in 2016 with unprecedented freebies and data capabilities, and this again brought rapid change to the market.

The upshot of all these developments was that from a market with nearly a dozen telecom operators, it is now left with only three (excluding state-owned BSNL). And if Vodafone decides to carry out its threat and liquidate its investment in India, there will be duopoly.

One can argue that the SC judgement has impacted all legacy players in the market, not VIL alone and since the sector itself is mired in debt, future operations should become unviable for Bharti as well. According to India Ratings and Research (Fitch Group), the aggregate gross debt of Vodafone Idea, Bharti (India business) and RJio was ₹3.9 lakh crore till March this year, “implying gross leverage of over 8 times for the sector. The liquidity profiles of India telcos are structurally weak as free cash flows are likely to remain negative over FY20-FY22 due to high capex intensity (₹1.2 lakh crore in FY19). Hence, these companies will continue to rely on refinancing or capital infusion.”

But the situation is particularly grim for Vodafone since it was already under severe financial stress, even before this judgement came. Rohit Chordia and Aniket Sethi at Kotak Institutional Equities have noted that VIL has been placed “in a particularly tricky spot since it is already under stress”. They said that assuming no relief came through (a moratorium in payments by the government, a review by the SC etc), “the outstanding liability of ₹285 billion or ₹28,500 crore (and another potential large demand for past Spectrum Usage Charge underpayment) would make the already-stressed situation even tougher for a VIL.

The company may need to resort to another large equity raise round to fund these payouts. This may not be easy, however, given that the amounts we are talking about are a multiple of the company’s current market capitalization.”  From the statements by the top management this week, it is clear that further equity infusion is ruled out.

Reacting to the SC judgement, VIL had said last month it was “extremely disappointed by the Hon’ble Supreme Court judgment on the Adjusted Gross Revenue (AGR) case. The matter is 14 years old and pertains to the issue of whether revenue from other non-telecom related activities should be included in the AGR definition under the telecom licence conditions… Clearly this judgment has significantly damaging implications for India’s telecom industry, which is already reeling under huge financial stress and is left with only four operators. Significant investment of several billion dollars has been made in creating world class networks. Today’s order has huge impact on two private operators while most of the other impacted operators have exited the sector. We urgently request that the government engage on this matter in order to find ways to mitigate the financial stress for the industry.”

Analysts at Motilal Oswal have said that while Bharti could manage to scrape through huge impending payments as mandated by the SC, by selling off some stake in its tower arm and perhaps raising more debt, the situation is different for VIL. “Bharti has net debt to EBITDA of 3.4 times with net debt of ₹93,000 crore as of first quarter of FY20. It has a 53% stake in Bharti Infratel which can fetch ₹25,000 crore and be utilised to repay the DoT payment, including interest and penalty….. VIL doesn’t have cash to manage beyond June 2020.”

As per the latest VIL annual report, its net debt doubled year on year to ₹11.86 lakh crore as of March 31 2019.

On its part, a committee of secretaries headed by the Cabinet Secretary is looking into ways to mitigate the financial stress in the telecom sector and it may come up with relaxation in not just the amount of dues payable by the legacy telecom operators but may also allow some moratorium. But whether these concessions come at all and if they do, are they enough for operators like VIL to continue having faith in the Indian market remain to be seen.

Apart from the impending huge payments to the government for past dues, impending incremental capex for acquiring 5G spectrum during upcoming auctions would also perhaps be a factor in Vodafone’s decision on Indian operations.