The success of Vodafone Idea Limited’s (Vi) follow-on public offer (FPO) and the commitment to subscribe to fresh equity from its promoter, the Aditya Birla Group, have led to fresh optimism about the beleaguered telecom service provider. After several years of uncertainty, it looks as though Vi has a shot at a turnaround, and it may become a third serious competitor in the Indian telecom services market.

The FPO, which aimed to raise Rs 180 billion, saw an oversubscription of seven times, a clear sign that both institutional investors and retail investors are willing to give Vi a chance. Anchor investors such as GQG Partners, UBS, Morgan Stanley Investment Management, Australian Super and Fidelity, and domestic mutual funds such as Quant and Motilal Oswal committed Rs 54 billion. The issue was priced at Rs 10-Rs 11 per share. Following dilution in the FPO, the stake of the government, which is the largest shareholder, will be reduced from around 32 per cent to 24 per cent.

The FPO comes on the heels of a preferential issue, priced at Rs 14.87 per equity share (including a premium of Rs 4.87 per share), aggregating to Rs 20.75 billion, to Oriana Investments Pte Limited (an Aditya Birla Group entity that forms a part of the promoter group).

At least part of the proceeds will go towards funding Vi’s capex plans of Rs 127.5 billion for network expansion. According to Akshaya Moondra, chief executive officer (CEO) of Vi, the telco will start rolling out 5G services in six to nine months of it completing the equity funding round.

The company also intends to raise another Rs 250 billion in the form of debt or convertible debentures or another such instrument. Once it has a war chest of Rs 450 billion, it intends to spend over 70 per cent as capex for 5G roll-out and 4G network expansion. For 4G, Vi will invest in refarming 900 MHz and 2100 MHz spectrum for better coverage and expanding 4G services in 17 priority circles.

Of the remaining funds, Rs 21.7 billion will be used for clearing the first installment of spectrum bought in 2021-22 and the rest will be utilised for general corporate purposes. The moratorium on spectrum dues ends in September 2025. Vi will have to pay Rs 21.7 billion by March 2026 and annual dues of Rs 415 billion every fiscal year during the period 2027-30. Vi will seek shareholders’ approval on the proposals at an extraordinary general meeting on May 8, 2024.

The competitive dynamics in the telecom services industry would improve substantially if Vi becomes a viable competitive entity again. According to the GSMA Intelligence Database, Vi is the sixth largest cellular operator globally in terms of number of subscribers in a single country of operations. Around 90 million of its subscribers are voice only, using legacy 2G networks.

VI lags far behind the other two companies fighting for leadership. Reliance Jio and Bharti Airtel have already rolled out countrywide 5G networks and have 467.59 million and 262.03 million subscribers respectively as of February 2024. The super fast 5G networks enable many new services and technologies focused on enterprises.  Jio and Airtel are looking to transition from being pure-play telcos offering telecom services to “techcos” offering value-added services such as data centres and analytics support. Jio’s entire subscriber uses mobile broadband, and about 300 million Airtel subscribers are also on mobile broadband.

If Vi can roll out 5G within six to nine months as it hopes, it may be able to capture a slice of that enterprise revenue. Moreover, if it can convert the bulk of its 2G customers to 4G/5G, it would see immediate gains in terms of average revenue per user (ARPU). A user who upgrades from 2G to 4G generates Rs 10-Rs 14 more per month in ARPU. Since 40 per cent of Vi’s users could potentially upgrade, there could be a big revenue upside. Vi had a blended ARPU (data and voice) of around Rs 145 per month per user (as of December 2023). Jio with Rs 182 and Airtel with Rs 208 have far higher ARPUs due to the higher preponderance of data users.

Vi also has a serious presence in underpenetrated rural areas where the teledensity is under 60 per cent and 4G coverage is spotty. If it can upgrade 4G networks in rural geographies as it plans, it could look to poach users from the PSU Bharat Sanchar Nigam Limited (BSNL).

BSNL has been unable to roll out 4G and industry analysts say it could rapidly lose up to 60 million 2G subscribers, who may be prepared to upgrade to smartphones and port out to any operator with mobile broadband offerings. Jio and Airtel have both steadily eroded Vi, and BSNL’s market shares. If Vi can beef up its 4G presence, it may be able to reverse this trend, not only retaining its own users but also targeting BSNL’s base.

The financials suggest that even Rs 450 billion will not be enough to enable Vi to compete with Jio and Airtel on a sustainable footing. Goldman Sachs reckons that Vi will need to raise at least Rs 650 billion over the next two years to do that unless it can engineer a big jump in ARPUs. It is likely that every telco will be looking to make tariff hikes over the next two years. Vi will be looking to push blended ARPUs to Rs 220 plus.

Vi has a net debt of over Rs 2.15 trillion. Around Rs 2 trillion of that is in the form of spectrum and adjusted gross revenue (AGR) dues to the government. Around Rs 77 billion is owed to banks, tower companies, etc. Vi has reduced its bank debt by around Rs 170 billion in the last two fiscals.

In terms of AGR dues, there is an outstanding curative petition on AGR initiated by Vi, which owes Rs 700 billion in AGR dues. If that receives a favourable verdict, the dues may reduce. There is also a chance that the government, which has already converted debt to equity once, could do so again. That could be a favourable outcome.

The fund infusion gives Vi a chance to turn things around. It has conceded a lot of ground to Airtel and Jio. But India’s market may be big enough for a comeback, and any market with three-way competition will always be better for the consumer than a duopoly.

As mentioned above, Vi has breathing space till its moratorium on spectrum dues ends. It has to use the time well. If other things fall into place, and it can roll out the networks as planned and hike tariffs, it could make a strong comeback.