Vodafone Idea has underperformed Bharti and Jio?
To understand the announcement, one needs to understand the background of Vodafone Idea in the telecom space. In the last few years, it has made huge losses, wiped out its net worth and lost millions of clients to Reliance Jio. Despite the mega merger, Vodafone Idea is left with 26% market share as against an imposing 41% for Reliance Jio. The problems of Vodafone Idea are best captured by the chart above. Over the last 5 years, RIL has gained 387% and Bharti has gained 64%. During the same period, Vodafone lost 87% market value.
What was the big announcement all about?
The roundtable was supposed to announce Vodafone’s fund raising time table and promoter participation. The meeting was silent on the promoter participation but more than made up with a branding twist. Here are some take-aways.
• It announced the launch of a new brand identity “Vi” marking the formal and official integration of the two popular brands; Idea and Vodafone.
• The two major shareholders in the venture, Vodafone PLC and Aditya Birla Group, committed to stay invested, although there was no explicit commitment on fund infusion by promoters.
• The meeting announced plans to raise Rs25,000cr by way of fresh funds through a mix of equity and convertibles. Either ways, it would have dilutive potential.
• This is likely to ensure better marketing coordination since the branding and advertising will now happen jointly instead of independently, as is the case now.
Next steps will be a lot more critical
The real challenge for Vodafone is not about the brand. The Vi concept will surely help better leverage their marketing and branding spends. As of now, Vodafone has larger financial problems to be addressed. A lot will depend; in fact its very survival will depend on how effectively the company can raise funds. Here are four issues to mull over.
a) AGR outstanding will still be the big overhang
The table below captures the gist of the outstanding License Fees and Spectrum Usage Charges (SUC) for Bharti and Vodafone Idea.
|Telecom Company||License Fees (DOT)||SUC Fees (DOT)||Total Outstanding|
While Bharti has already paid Rs18,000cr out of its dues, Vodafone has only paid Rs7500cr. That leaves Vodafone with an outstanding of Rs46,000cr or an average payout of Rs4600cr per year over 10 years starting March 2021. Markets are unlikely to be convinced with the ability of Vodafone to service debt unless the Rs25,000cr is raised soon. Even the 10-year reprieve may be quite steep for Vodafone Idea to be able to service the obligation.
b) Room for making more losses is very limited
The chart below captures the net losses made by Vodafone Idea in the last five years.
As of Mar-20 fiscal year end, the reserves and surplus stand at Rs-19700cr while the net worth stands at just Rs9001cr despite aggressive capital infusion in last five years. It must be remembered that Vodafone Idea reported loss of Rs25,400cr in the Jun-20 quarter so the net worth is effectively wiped out; and more. Unless the capital raising is done quickly, Vodafone would be technically close to bankruptcy.
c) How will Vodafone Idea handle the ARPU issue?
That is the million dollar question. As of Mar-20, the average revenue per user (ARPU) for Vodafone stood at Rs124 compared to Rs131 for Reliance Jio and Rs154 for Bharti Airtel. By Jun-20, the ARPUs of Vodafone fell further to Rs114. Vodafone has internally estimated that it will require ARPUs of over Rs200 to be able to survive in this business in the long term.
d) Equity dilution will be a big challenge
This is another overhang for Vodafone Idea. Currently, Vodafone has around 2873 crore shares outstanding as part of its equity capital with a market cap of Rs35,500cr. Assuming that the equity dilution (current or potential) happens around the current price of Rs.12.50, Vodafone will need to dilute its capital by another 2000 crore shares to raise Rs25,000cr. That would leave Vodafone with a bloated equity base 4873 crore outstanding shares. Creating value with that kind of a bloated equity base will be the biggest challenge that Vodafone Idea will face. It will have to go a lot beyond the seductive charm of Vi.