This article details the 5G spectrum purchase, stake sale to the GOI, Government’s Telecom Relief Package, the AGR case for Vodafone-Idea, it’s implications, funding, and investors. Will the company Shut Down or not? Some predictions about the stock price and the future Outlook of the company.
Vodafone Idea – Buys 5G Spectrum Worth 18K Crore in Auction
Jio, Bharti Airtel, and Vodafone-Idea have participated in the 5G auction and emerged as the key buyers for the 5G spectrum auctioned by the Indian government.
The total revenue accumulated for the government is close to 1.5 lakh crore from the 5G auction. About 60% of this pool is contributed by the largest telecom operator in the country – Reliance JIO.
The Mukesh Ambani lead telecom company bought 24,740 MHz of spectrum and paid 88,078 crores. The Sunil Bharti Mittal lead Airtel was the runner-up, bought 19,867 Mhz of spectrum by paying a massive sum of 43,084 crores.
Lastly, Vodafone-Idea has bought 6228 MHz of spectrum by paying Rs. 18,799 crores. The VI is ailing due to the AGR dues and not having the financial muscle to match Airtel or JIO was a conservative player in the 5G auction.
The three telcos will be the main drivers of 5G deployment in one of the most competitive telecom markets in the world. The 5G deployment will bring 10X the speed of 4G but can also bring tariff hikes to compensate for the massive outflow of funds by the telecom players.
All three telecom players will start the 5G deployment in metros by the end of 2022 and will then deploy the network in tier 2 and tier 3 cities.
I wasn’t expecting Vodafone Idea to invest heavily on the 5G spectrum but the company surprised me by investing a sizeable chunk of money.
We will wait and observe which circles the company plans to roll out the network first and focus on building a 5G customer base. For VI, It is not a level playing field Vs. JIO as will have a much larger 5G presence in India. It is also likely that high-value VI customers may churn to JIO due to a better 5G network and coverage.
But it is remarkable to see the company making a comeback and still fighting after the massive AGR case payout and the company’s financial health.
Recently, there was a development that Mr. Ravinder Takkar, the current CEO will step down, and Mr. Akshay Moondra will take over. Mr. Moondra is a finance wizard and has been the Chief Financial officer of Idea Cellular before the merger. Currently, he is the CFO at VI.
He will find several new challenges in terms of financial management and business strategy once he takes over as the CEO of VI.
Vodafone Idea Funding News Update – Amazon May Invest Rs. 20,000 Crore
23 June 2022 – Vodafone Idea is said to raise 436 Crore from the parent company Vodafone PLC. The company has informed the Bombay Stock exchange that the parent company has approved the proposal.
The funding will be at a valuation of Rs. 10.20 per share. The equity shares will be issued to Euro Pacific Securities Ltd. (a Vodafone Group entity and promoter of the Company), on a preferential basis”.
The infusion of capital by the parent company is a positive sign as the cash-strapped telecom has been struggling to raise funds. Also, for a long time, both ABG (Aditya Birla Group) and Vodafone Plc have not induced any funds into the system. The availability of funds is crucial for the company as it prepares for the battle of 5G.
The VI shares have also gained some lost ground after the news broke out.
Vodafone Idea 35.8% Stake Sale to the Government of India
There was a knee-jerk reaction to the stake sale news of VI to the Government that led to a 20% decline in the share price for the company on 11th January 2022.
Based on the Telecom Relief Package, the company plans to offload a 35.8% stake to the Government at Rs. 10/share and raise Rs. 16,000 crores. If the government approves the stake sale, then Vodafone Group (UK) will have 28.5% share, and Mr. Kumar Mangalam Birla-owned Aditya Birla group will have 17.8% share from the existing 44.39% and 27.66% shares, respectively.
While the markets reacted negatively from the short-term growth point of view, Analysts believe this can be good for long-term survival.
There are several benefits to the company due to the stake sale; some of them are as follows:
1. GOI, the single largest investor, has a higher credit rating than the other partners.
2. This, in turn, can attract more investments for the company from institutional investors.
3. The GOI’s presence as a large stakeholder also improves the regulatory point of view towards the company and will have some future protection from predatory rivals.
4. The company may have more cash and credibility to participate in the 5G auction and roll out the 5G services that will define the company’s future.
On the negative side, there are concerns about the future prospects of VI; and whether it will be a competitive player in the fierce telecom market ruled by Reliance JIO.
Vodafone Idea – Can it Shut Down?
The short answer is – No. The Telecom Relief package by the GOI has made a huge difference to the outlook of the company, which otherwise would have collapsed.
Now you can read the long answer and the reason why it will not shut down. There are many pieces in this puzzle, and Vodafone-idea’s survival and growth depend on several factors.
Firstly, Vodafone-Idea is not a small company – they employ over 12000 people and have yearly revenue of Rs. 40,000+ Crores. The company has a subscriber base of 2.7 Crore users. You can’t close a company of this size and magnitude overnight.
Steps Taken By Government to Improve the Telecom Sectors Financial Viability:
- The reduction in Bank Guarantees requirements (80%) against License Fee (LF).
- Lower Interest rates and Penalties removal – Delay in payments for License fees and Spectrum Usage Charges will have MCLR + 2% interest rates (earlier was MCLR+4%).
- Penalties and interest on penalties is removed.
- No Bank Guarantees are required for the Auction installment payments.
- The spectrum lease tenure is increased from 20 to 30 years.
- Surrender of the spectrum will be permitted after ten years for the spectrum acquired in future auctions.
- Telcos can share Spectrum, and the SUC of 0.5% for spectrum sharing is not applicable anymore.
- There is Automatic approval for 100% Foreign Direct Investment (FDI) in Telecom Sector.
So are the new Telecom Reforms sufficient for VI to survive?
The Short Answer is Yes.
Considering the company will not have to pay installments for SUC (92K Crore) and AGR Dues (58K Crore), there is a significant reduction in terms of liquidity crunch. Also, they are getting an option to pay interest through the equity route can be an added advantage.
The statement from the company’s promoters – Mr. KM Birla and Nick Read, is quite positive, and as per the statement, they are looking forward to reviving the business and moving ahead.
Mr. K.M Birla Said, “The pathbreaking reforms announced by the government today will go a long way in unshackling the telecom sector”.“We commend the resolve shown by the Government of India, under PM Modi’s Leadership, to find a comprehensive solution that would support a competitive and sustainable telecom sector in India”, said Nick Read, CEO, Vodafone Group.
The Major Updates that Will Shape Up the Future of the Company:
There is a major relief in terms of the Telecom package by the government but there are still some major concerns for the business.
The path ahead is hard; huge debt and financing costs, 5G investments, and unforgiving rivals with deep pockets.
The GOI has deferred the AGR payments. The company still has to pay the 58K Crore AGR Dues with interest, and even the arithmetic errors are not allowed to be corrected so far.
The company has lost market share and talent pool, and most importantly, the brand name has lost its glory in the last 2-3 years. The consumer experience has not been great, and many high-paying users have ported to rivals. The rebranding to V! from Vodafone-Idea shows the company is not giving up the fight. But branding is not sufficient. They will have to increase the subscriber and revenue market share.
Also, considering the stock price has taken a beating, it is hard for the company to show valuation to potential investors and raise funds as Reliance Jio did. However, after the Relief package, I expect things to change, and they will likely attract investments.
V! has been in talks with several investors, and hopefully, we may get good news in the coming months.
Another challenge is to invest heavily in the roll-out of 5G services in the next couple of years. V! can’t be late to the market with 5G, as more high-value customers can churn and port to JIO or Airtel.
How much funding they can get from Investment firms or promoters will shape the future.
Lastly, the company will have to raise tariffs to improve the business’s profitability. The company is making losses quarter after quarter and will have to eventually increase the prices for both Prepaid and Postpaid subscribers to get back in the game.
The Vodafone Idea share reached the low of Rs. 3.4 in Feb 2020. Back then, the uncertainty around the company’s survival was at its peak.
The dismissal of arithmetic error calculations also impacted the Share price and it tanked from Rs. 10 to Rs. 6 in August 2021.
However, on 16th September, the Share price increased by 25% and closed at Rs. 11.4 after the telecom relief package by the GOI was announced.
The Vodafone Idea Stock price ranges from Rs. 8 to Rs. 12 and will probably see a break-out only if the company can secure a significant amount of funding from an investor.
AGR Case and its Implications
2nd August – Kumar Manglam Letter to Rajiv Gaube, Cabinet Secretary: Mr. Kumar Manglam Birla, in a letter dated 7th June 2021, has written to the cabinet secretary the following:
“It is with a sense of duty towards the 27 Crore Indians connected by ViL, I am more than willing to hand over my stake in the company to any entity, public sector, government domestic financial entity, or any other, that the government may consider worthy of keeping the company as a going concern. My team and I will be more than happy to work with the government to urgently explore all possible options and solutions to save the company and strengthen it in the national interest without any consideration of our private interest,” Birla said in his letter dated June 7 to Rajiv Gauba, Cabinet Secretary.
AGR Case Update – On 22nd July 2021 -The Supreme Court rejected the plea for the recalculation or reconciliation of errors in the AGR calculation, dealing a big blow to the incumbent telcos (Vodafone-Idea, Airtel, and Tata Telecom). The Supreme Court judgment on deferment payments for the AGR dues gave some respite but seriously cripples the company and its future outlook.
The apex court, in its AGR judgment has said that the company can pay the Rs. 58,000 crores of AGR dues in the 10-year period. Also, Mr. Birla’s letter to the government clearly shows that they don’t have any plan or hope for the company, and he is even willing to give away the 27.2% stake that he has in the company. (Rest 44% stake is owned by Vodafone Group).
Update 14th Feb 2020 – AGR Verdict and Review Petition
Today, the Supreme Court rejected the review petition filed by Vodafone-Idea and Airtel in the AGR (Adjusted Gross Revenue) case.
Three Bench Judge Panel, headed by Justice Arun Mishra, was extremely angry at the Telecom companies for defying the orders to pay dues before the 24th January 2020 deadline. To recall, VIL needs to pay 53,000 crores and Airtel 35,000 Crores.
Both Telecom companies sought relief from the apex court regarding a waiver of interest or an increase in the payment period. But instead, the court thrashed them for not obeying the previous judgment where the court had ordered them to pay the dues.
Justice Arun Mishra said” “The companies have violated the order passed by this court in pith and substance. Despite the dismissal of the review application, they have not deposited any amount so far.”
“It appears how things are happening that they have scant respect to the directions issued by this court,”
Also, DOT decided to take no action against the incumbent Telecos. They also faced the wrath of justice Arun Mishra. Previously, DOT officials passed an order to take no action against VIL & Airtel for not depositing the required dues.
“This kind of order should not have been passed by the desk officer at all. In the circumstances, we draw contempt proceedings against the desk officer for passing the order and violating the order passed by this court,”
Justice Arun Mishra was furious at the turn of events and asked the companies to clear the dues, or the MD and directors need to be present at the next hearing scheduled on 17th March 2020.
This is a subtle way to say; you may go to jail in case you fail to pay the dues to the government. An extremely unpleasant situation for Mr. Sunil Bharti Mittal and Mr. Kumar Manglam Birla.
The judge’s words sent shivers to the top management of both Telecom companies. In its quick response, Airtel has agreed that they will cough up Rs. 10,000 Crore by 20th Feb and the remaining before the next hearing.
DOT officials also sprung to action and have issued notices for the payment of the dues to the Telecom companies.
On the other hand, VIL seems to be buying time and said they are planning to pay some part of the dues before the next hearing. They have not specified how much and when. But they will pay in the coming days. Also, in the statement shared by VIL, they categorically mention that the company may not continue in case there is no relief from the government or the Supreme Court.
The stock price for VIL tanked by 24% on Friday after the Supreme Court order.
VIL is in a fix as both Mr. Birla and Nick Read have said previously that they are not keen to run the business if they have to pay the total amount.
Also, the recent letter by the company clearly states they may not be able to continue business without relief from the government.
So, will VIL shut shop? It is a tricky situation; at this point, the company can go in any direction.