Vi : running out of ideas

Aug 23, 2023

Vodafone Idea (Vi) reported its Q1FY24 results — a net loss of INR 7,840 crore, which is a worrying trend for investors. If you read the Q1FY24 results, there’s not much to be optimistic about.

Jio/Airtel are continuously chipping away market share and subscribers from Vodafone. Vodafone’s 5G rollout is delayed. Losses are piling up. Debt is not going down fast enough. There are a lot of issues burning at Vodafone — but how serious are they? Do they pose an existential risk?

And more importantly, is a duopoly in the Indian telecom sector inevitable?

What’s the business?

Everyone’s heard of Vodafone. India’s third biggest telecom operator after Reliance Jio and Bharti Airtel. They enable you to make calls. Provide you with internet access and a host of other value added services.

You need a lot of money to start a telecom company. Setting up telecom towers. Buying airwaves. Building the network & distribution infrastructure. Its a high capex business and in the current scenario highly competitive. A decade back, there used to be around 15+ telecom players. Now, there are only 4 major players — out of which only 2 look sustainable.

The biggest beneficiary of the telecom boom in India has been the Government with inflow of FDIs, earning license fees and making billions of dollars by selling spectrum. What could be a better business than selling airwaves and radio frequencies?!

A chest full of money made from selling airwaves.

Coming back to the question at hand — how bad is the situation at Vodafone? Let’s take a quick peek.

Problem #1: Decline in subscriber base

In 2018, the merger of Vodafone and Idea created the largest telecom company in India by revenue and subscriber base. This was done as a strategic move, because in 2016, Reliance launched Jio which completely disrupted the playing field in the telecom industry. I mean, how do you compete with someone who is offering services for free?
After the merger, Vi was optimistic that it would remain the largest telco and combat incoming competition from Jio. However, fast forward to today — it has lost rank and is the 3rd largest telco lagging FAR behind Jio.
At the end of May’23, Vi’s subscriber base stood at approx. 231 million representing a market share of 20.2%. The company lost 2.8 million subscribers in the month of May’23 making it a 26th consecutive month of customer loss. I’m a Vi user and the only reason I haven’t switched to Jio/Airtel is because I am too goddamn lazy!
The launch of JioBharat is going to lead to a further decline in Vodafone’s 2G subscriber base as JioBharat accelerates the transition from 2G to 4G in rural areas. A double whammy.
By the end of FY24, Jio + Airtel are expected to corner around 83% revenue market share at the expense of Vodafone Idea. Not a fun statistic to look at if you’re an investor in Vodafone. I really hope you’re not.

Problem #2: Delay in launch of 5G

India is where the world’s fastest 5G rollout is happening. Over 3 LAKH 5G mobile sites have been installed across 700+ districts — all in a span of just 10 months. The problem? Only two telecom operators are rolling out 5G services in India. Reliance Jio and Bharti Airtel. Vodafone is watching from the sidelines. And BSNL — well, it still hasn’t rolled out 4G!
For Vi to dip its pinky finger in the 5G pond, it needs funding. A LOT OF FUNDING. It is estimated that Vi requires $8-10 billion of capital infusion to solidify its 4G infrastructure and launch the next generation of 5G. However, who is going to infuse that money? New investors & lenders are waiting for the promoters to infuse some serious money before any fundraising plans can be put on the table.
One of the promoter entities (most likely Aditya Birla Group) has promised an INR 2,000 crore financial support for payment of pending dues to government (spectrum fees etc.) — but honestly that’s not going to cut it for Vi. They need more infusion of money to repay vendors + build the 5G network infra. If the money doesn’t come in fast enough, they’ll continue to bleed subscribers.

Problem #3: Astronomical Debt

Gross debt of INR 2.12 trillion the bulk of which is deferred spectrum obligations of INR 1.34 trillion and AGR dues of INR 668.6 billion payable to the government. Like I said, the Government is the biggest beneficiary here. Debt from banks & financial institutions stood at INR 95 billion. Apart from debt, outstanding dues to vendors like Indus Towers, ATC and Nokia was > 14,000 crore.
Negative net-worth of INR 743 billion. Cash balance of a meagre INR 230 crore as at 31 March 2023. Negative cash flows. These are signs that the company is on the brink of collapse.
The situation above is AFTER the government converted interest dues of INR 16,133 crore into equity and became the largest shareholder in the company with a 33.34% stake.

Can Vi survive & grow?

Looks very unlikely given the consistent loss of subscribers and the delay in launch of 5G. However, I see the following options where Vi could surive.

Option 1: Government waives off the spectrum fees and AGR dues. They probably buy the remaining stake in Vi and merge it with BSNL. Government then pumps taxpayer money to keep this merged entity alive. I pray to god this doesn’t happen.

Option 2: Vi opens up for sale. Some interested party [insert Tata] buys controlling stake in the company for a 60-80% discount. I don’t see why Jio/Airtel would buy Vi, they’re able to easily take market share away from Vi. Massive fund infusion ensues post acquisition, we’re talking upwards of $8-12 BILLION here. Vi invests in 5G, and is somehow able to reduce it’s customer churn.

Option 3: Current promoters infuse a LOT of money. Then they go for a fundraise asking for VC/PE money. Same thing explained in Option 2 happens to reduce subscriber loss.

If you’re a taxpayer — Option 1 is bad for you. If you’re an investor, you’d pray for Option 2 or Option 3 to materialize which would cause a short term pop in the stock price.

Because…..Vi, is running out of time. And a duopoly, looks certain.

[Note: The author is not a SEBI registered investment advisor and the contents of this article do NOT constitute investment advice. Always do your own research before you invest in a company]

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