For several years, the Indian telecom services sector has been an effective duopoly. Vodafone Idea (Vi) has been unable to maintain a competitive position due to its huge financial stress, and Bharti Airtel and Reliance Jio have battled for supremacy. The fourth potential competitor, the PSU Bharat Sanchar Nigam Limi­ted is also mired in financial trouble.

Things may be changing now for Vi. Rumours and reports suggest that the embattled company, which has accumulated losses for the last six years, may be able to raise the resources it needs.

There has been some policy support. The government granted Vi a four-year moratorium on the payment of debt. That gave it some breathing space. The government also converted interest on that debt to equity, thus becoming the single largest shareholder in Vi.

Despite the financial stress, Vi bought 5G spectrum (mid-band 3300 MHz and high-speed mmWave) worth Rs 188 billion in last year’s spectrum auction. But while it has 5G spectrum, it has not been able to roll out a 5G network, even as Jio and Airtel have taken over that space. Indeed, it needs to invest in 4G infrastructure as well. Vi has also struggled to hold onto high-end 4G customers and has lost a steady stream of subscribers. While it still retains a substantial subscriber base of 221 million, a large proportion of users are voice-only, with no data footprint. This means lower ARPUs.

The clock is also ticking for Vi on the de­bt front. The telco has a gross debt (ex­clu­ding lease liabilities and including in­terest accrued but not due yet) of Rs 2,117.6 billion as of June 30, 2023. The company will owe the government Rs 413 billion each year as payouts from October 2025 onwards when the four-year moratorium is due to end.

The annual revenues for 2022-23 were in the range of Rs 421 billion and Vi is ru­nning losses at net level. The annual debt service post October 2025 is almost equal to the current revenues. So, Vi would need to considerably expand its topline, as well as generate operational profits to have a realistic chance at servicing debt once the moratorium ends.

Vi needs a substantial fresh infusion of funding. It has been trying to raise funding to the tune of Rs 200 billion for a while, for a start. In June, the company said that it had secured a commitment of Rs 90 billion of fresh funding from the promoters, the Aditya Birla Group and UK’s Vodafone plc. Of this, Rs 20 billion consists of a letter of support from one of the promoters.

It will also have to raise money from other sources and that has not been forthcoming. However, statements from the company suggest negotiations are promising. In August, Vi chief executive officer Akshaya Moondra told the Department of Telecommunications that the company has term sheets from several potential inves­tors for capital infusion. He said that discussions with multiple groups of investors on both equity and equity-linked instruments had progressed. He also told analysts in an ear­nings call, “Particularly in the last mon­th…some of these discussions have started progressing to a level of due di­ligence or proposals being discussed.” He said he expects “to conclude these discussions in the coming quarter” (October-December 2023).

Vi has been losing subscribers since the April-June 2018 quarter. It has also suffered financial losses for six straight financial years since the merger of Voda­fone India and Idea Cellular. Accumulated losses amount to Rs 1.2 trillion. In realistic terms, Vi will need investments ranging upwards of $4 billion-$6 billion and may­be as much as $10 billion-$15 billion to be a viable competitive player.

Compare, for example, the quarterly capex of Reliance Jio, which is around $2 billion and that of Bharti Airtel, which is app­roxi­mately $1 billion. If Vi is to compete, it will have to expend a similar capex and thus, would need $4 billion-$6 billion to be a meaningful competitor.

The government could also take the option of converting the principal of the debt owed to equity. If this conversion do­es take place, it would result in the government’s stake climbing well beyond 50 per cent of the shareholding. The government is already Vi’s largest shareholder with a 33.1 per cent stake due to the conversion of interest owed. Of the two promoters, UK’s Vodafone Plc holds 32.3 per cent while the Aditya Birla Group holds 18.1 per cent. The remaining 16.5 per cent is public shareholding.

On the surface, Vi’s financials are very poor and as a result, so is its competitive position. In 2022-23, it registered Rs 422 billion in revenues, which was a 9.5 per cent growth over 2021-22. Operating pro­fits (profits before interest, depreciation and taxes [PBDIT]) adjusted for leases amounted to Rs 165 billion, which was up 6.5 per cent over the Rs 155 billion recor­ded the year before. At the bottomline, after accounting for interest and depreciation, the company reported losses of Rs 293 billion (Rs 282 billion in financial year 2022). In this fiscal year, the government also converted Rs 161 billion of interest to equity.

In the first quarter of financial year 2023, Vi registered Rs 106.5 billion in revenues and Rs 41.57 billion in operating profits. After accounting for depreciation of Rs 56.15 billion, it paid interest of Rs 63.8 billion. Net losses amounted to Rs 78.4 billion. Revenues rose 1.2 per cent compared to the fourth quarter of financial year 2023. The company has outstanding dues to vendors, including a big chunk to Indus Towers. It also has current outstandings to the government, which are not covered by the moratorium. However, in its interactions with financial institutions and analysts, Vi has claimed that its operational debt (outstandings owed to vendors) will ease considerably from the second quarter of financial year 2024 and it should be able to cover those from its operational profits.

Vi has 221 million subscribers (as of end-June 2023), but a large proportion of these are low-ARPU voice-only 2G users and 89.7 per cent of subscribers are prepaid. This proportion, however, has impro­ved compared to the fourth quarter of financial year 2023, when over 90 per cent of subscribers were prepaid. So, Vi is losing low-ARPU subscribers rather than high-ARPU ones, and it has seen some subscrib­ers up­grading. The company claims that 136 mi­llion of its subscribers now have data plans and about 123 million are on 4G.

Vi’s current blended ARPU (first quarter FY2024) is Rs 139 (up from Rs 135 in the fourth quarter of financial year 2023), well below Jio’s ARPU of Rs 180.50 and Airtel’s Rs 200. Vi also continues to suffer subscriber losses. Its subscriber base has dropped from 244 million a year ago to 221 million. While it still holds 20-21 per cent customer marketshare, it has only 18 per cent of revenue marketshare. The company has 4G capacity covering around 1 billion population and it can process 60 petabytes per day, so it has the capacity to service many more 4G users.

The Indian market is more or less saturated in terms of penetration, based pu­rely on teledensity. While there are grow­th opportunities, these are more complex than simply signing up new subscribers. They involve upgrading existing subscri­bers and moving them to data plans and mobile broadband. Around 58 per cent of Indian subscribers are estimated to have smartphones but given the policy thrust on providing digital services, there is a fairly rapid up­take of smartphones. Overall, industry re­ve­nues have grown by a CAGR of 11 per cent between 2018-19 and 2022-23. Gro­wth could accelerate in an environment where subscribers upgrade, and telcos can also hike tariffs.

These are some reasons for optimism for the industry. Specific to Vi, the government’s conversion of interest to equity and its willingness to offer a moratorium (and maybe, further conversion if necessary) suggest that the policymakers are interested in helping Vi survive, perhaps because it makes for a more competitive landscape.

The way forward for Vi (and other telcos) is to increase ARPUs. While all three private operators have instituted tariff hikes, the key to this is converting voice-only 2G users to 4G data users.

Vi has lost overall subscribers in the first quarter of financial year 2024 (April-June 2023), but it has gained a net 1 million 4G subscribers in the fourth quarter and another 300,000 4G subscribers in the first quarter, which is a good sign. As of now, there are not too many use cases for 5G and most data subscribers will probably be satisfied with 4G, particularly if they are upgrading from 2G. Hence, Vi could focus on trying to facilitate this conversion and upgrade. It has only a little over 50 per cent mobile broadband penetration of its own subscriber base whereas Jio has 100 per cent penetration and Airtel has over 67 per cent penetration. Can Vi raise the penetration of mobile broadband to nearer the 70 per cent mark? It would certainly lead to sharp improvements in ARPU.

As mentioned above, Vi has Rs 2.12 trillion in gross debt. This includes deferred spectrum payment obligations of Rs 1,337.4 billion and an AGR liability of Rs 668.6 billion due to the government. The debt to banks and financial institutions is Rs 95 billion and optionally convertible debentures amounting to Rs 16.6 billion. Given cash and cash equivalents of Rs 2.5 billion, the net debt is Rs 2,115.1 billion. The debt from banks and financial institutions has reduced by Rs 57 billion during the last year – it was Rs 152 billion in the first quarter of financial year 2023. Non-government debt to banks and lenders has decreased by Rs 120 billion over the last two fiscal years.

Vi intends to pay a spectrum auction installment of Rs 16.8 billion towards the 2022 auction. The accumulation of vendor payments will be largely met with the help of the letter of support of Rs 20 billion from the promoter. From next quarter, the company claims it will need to service debt to the tune of Rs 5 billion, followed by about Rs 17 billion in the following quarter and another Rs 5 billion in the fourth quarter of financial year 2024. Since cash generation should be around Rs 60 billion, this short-term and operational debt can be managed.

But the numbers in terms of long-term debt are inescapable. Vi needs to dramatically grow its revenues and raise operating profit margins in order to service its outstanding debt. This, in turn, will require investments of $4 billion upwards – ideally more than $10 billion – to give it a chance to become a sustainable business that can compete and remain profitable.

The company’s stock has seen an 85 per cent price appreciation in the past six months, in the hope that it will successfully tie together the financing it needs. If it does manage a turnaround, that would be good for the overall health of the telecom services market.

Devangshu Datta