The government’s decision to convert Rs 36,950 crore dues of Vodafone Idea’s (VIL) into equity is a big positive, Citi said on Monday. While this move will increase the government’s shareholding in VIL from 22.6 percent to 49 percent, operational control will remain with the promoters. “We view this as a major display of support by the government in a very timely manner, which should provide significant cash flow relief to VI in the next 3 years and help it complete its bank debt raise,” Citi said in its latest report on Monday. The move also lifts concerns on tower companies like Indus Towers.
The Indian government has decided to convert Rs 36,950 crore of VIL’s outstanding spectrum auction dues into equity, under the provisions of the September 2021 telecom reforms package. VIL announced this development in an exchange filing on March 30. As a result, the government’s shareholding in VIL will increase to 48.99 percent from 22.6 percent. However, VIL’s promoters will continue to retain operational control of the company.
Citi described this “material development” as having significant positive implications for the company.
Citi’s Perspective on the Development
“The conversion of spectrum dues to equity will bring down VI’s overall net debt by nearly 18 percent. We estimate VI’s spectrum dues (for pre-2021 spectrum) that are payable over FY26/27/28E could reduce from Rs 110/250/250 billion (Rs 11,000/25,000/25,000 crore) to nearly Rs 5/50/150 billion (Rs 500/5,000/15,000 crore), implying over Rs 400 billion (Rs 40,000 crore) of cash flow relief over the next three years…note that annual spectrum payments of about Rs 22 bn (Rs 2,200 crore) for post-2021 spectrum plus annual AGR payments of around Rs 165 bn (Rs 16,500 crore) would remain payable,” the report said.
This should help VI move one step closer to completing its long-delayed debt raise from banks, Citi added.
“Additionally, the ongoing launch of 5G services in select cities (Mumbai already launched) should improve sentiment around the company arresting subscriber losses going forward,” the report noted.
“Government has, in line with the September 2021 reforms and support package for telecom sector has decided to convert the outstanding spectrum auction dues, including deferred dues repayable after expiry of the moratorium period, into equity shares to be issued to the Government of India…,” VIL said in an exchange filing on Sunday.
“Post the aforesaid issuance of equity shares, the Government of India shareholding in the company will increase from existing 22.60 per cent to approx. 48.99 per cent. The promoters will continue to have operational control of the company,” VIL stated.
“The company’s balance sheet leverage has remained uncomfortably high and had worsened following the adverse Supreme Court verdict on the AGR issue in Oct 2019. However, government moves including a four-year moratorium on spectrum & AGR payments have provided material cash flow relief, while the completion of the long-delayed equity raise ensures sufficient capital for the company to reinvest in the network and reduce the gap vis-a-vis its two peers on 4G coverage and 5G rollouts,” the report added.
“Besides the impressive Jun 2024 tariff hikes taken by the telcos, we are additionally enthused by the following developments that drive our constructive stance: 1. A discernible shift in stance by market leader Jio towards monetisation; 2. The peak of competitive intensity is now likely behind us; 3. Moves by Jio and Bharti to monetise 5G are a clear positive. Completion of the ongoing debt raise remains key to monitor,” Citi said.
Risks
Risks highlighted by Citi include, “1. Competitive intensity worsening, leading to disappointing tariff hikes in future; 2. No reduction in subscriber churn; 3. Lower than expected pace of 4G subscriber additions; 4. Delay in 5G roll-outs; 5. Higher-than-expected dilution as and when the government converts future dues to equity.”
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