Vodafone Idea Limited (VIL) recently unveiled a new unified brand identity, Vi. The rebranding marks the completion of the integration of the operations of Vodafone India and Idea Cellular. The rebranding exercise comes in the wake of the Supreme Court’s granting of a 10-year timeframe to VIL to pay its outstanding adjusted gross revenue (AGR) dues. The judgment has given a respite of sorts to the beleaguered telco, pulling it back from the brink, at least for the time being. While industry observers are still debating whether VIL will be able to revive its fortunes, the brand makeover signals that the telco is keen to take another shot at the game.
Vodafone India and Idea Cellular merged their operations back in 2018 to create a combined entity with more firepower to overcome the competitive pressures in the market. However, VIL’s days as the country’s number one telecom operator were numbered and its journey thereafter was fraught with challenges. Till date, the merged entity has not seen any profit. Its EBITDA (earnings before interest, taxes, depreciation and amortisation) has been under pressure despite operational synergies kicking in, and its ARPUs remain amongst the lowest in the industry. In less than two years, its user base has tumbled from 408 million to about 280 million as of end-June 2020. The company has seen its net worth eroding quarter after quarter. It posted a consolidated net loss of Rs 254.6 billion in the quarter ended June 2020, its eighth successive quarterly loss. Its cash and cash equivalents stood at just Rs 34.5 billion at the end of the quarter while its net debt stood at Rs 1.16 trillion, the highest in the industry.
At this point, will the brand revamp help the company reverse the declining trajectory? As per VIL, the new unified brand will bring in more subscribers and thus, growth. “The brand integration not only marks the completion of the largest telecom merger in the world, but also sets us on our future journey to offer world class digital experiences to one billion Indians on our strong 4G network,” noted Ravinder Takkar, managing director (MD) and chief executive officer (CEO), Vodafone Idea Limited, in a company statement.
Unfortunately, this optimism is not shared by industry analysts, who remain skeptical and believe that mere rebranding will not turn the tide in VIL’s favour. VIL needs deeper, more aggressive strategies than adopting a new logo to pay its outstanding dues, arrest subscriber churn and bolster its 4G network. Edelweiss Securities has estimated that VIL would have to pay Rs 73 billion per annum starting 2022-23 in AGR dues. This is on top of the Rs 150 billion that needs to be paid annually for auctioned spectrum, starting 2022-23. All of this would accentuate the cash flow strain on VIL. Analysts at Deutsche Bank Research note that the telco needs recapitalisation of at least Rs 700 billion, which is three times its market capitalisation, to reach a manageable liquidity position.
Putting its house in order
VIL will need substantial equity infusion, higher ARPUs, competitive network spends and significant operational improvement to meet its cash flow needs over the medium term and bolster its long-term prospects.
Substantial capital infusion
The company needs money to not just meet its outstanding AGR payments but also to invest in its networks and services and stay relevant in the market. As per industry estimates, VIL would need a capital infusion of $3 billion-$4 billion to effectively compete in the market. To this end, the telco has announced plans to raise up to Rs 250 billion in one or more tranches. The board of the Birla Group (Idea’s promoters) has approved two methods for fund raising – through the issue of equity shares via a public issue, preferential allotment, private placement or qualified institutional placement; and through the issue of non-convertible debentures. The capital to be raised via each route has been capped at Rs 150 billion. The proposed fundraising would be subject to regulatory and shareholder approvals. VIL will take up the proposal at its annual general meeting on September 30, 2020.
Meanwhile, with the Indus Towers-Bharti infratel merger now finalised, VIL will be receiving a cash consideration of around Rs 40.4 billion after selling its 11.15 per cent stake in Indus Towers. The telco must also look at monetising its other non-core assets such as fibre infrastructure and data centre assets.
Tariff hike for higher ARPUs
Analysts believe that VIL would need to more than double its ARPU to meet its AGR obligations. As per an analysis by Bank of America (BofA), VIL would need to ramp up its ARPUs to Rs 200-Rs 240 over the next 18 months from the current levels of Rs 124. Meanwhile, Kotak’s analysts note that VIL’s ARPUs need to increase to Rs 245 to achieve cash flow break-even in 2022-23. Clearly, without a meaningful tariff hike, such a jump in ARPUs is unlikely.
Earlier, in December 2019, all the three private telcos had increased their tariffs in a one-of-its-kind move since 2016. It helped the incumbents’ ARPUs recover a bit after the brutal price wars of the past few years. BofA now expects the next revision in tariffs to take place within the next three months. It will also be crucial for telcos to prepare a war chest for the upcoming 5G investments.
Ironically, while it is paramount for VIL’s long-term prospects that all telcos hike their tariffs, such revisions will make Airtel and Jio, which have leaner balance sheets, more cash rich. This, in turn, will help them increase their network spends and improve their offerings to subscribers. As such, it will be important for VIL to ensure that its offerings are competitive and its service quality is high, to keep pace with Airtel and Jio.
Building a strong network
As per VIL, it has more than doubled its 4G coverage since its merger in 2018 and its network now covers a billion Indians. As a part of the integration exercise, the telco has refarmed its large spectrum portfolio to create significant network capacity. It has stated that most of its spectrum in the 1846 MHz band is being used for 4G services.
So far, the radio network integration has been completed in 19 circles covering over 93 per cent of districts across the country. In the process, it has de-duplicated 97,000 sites.
Further, VIL has stated that it has engineered its network with 5G-ready technology elements to double the data capacity since the merger. To this end, it has deployed open RAN (radio access network) technology at 12,000 massive MIMO sites and has undertaken dynamic spectrum refarming on 10,000 sites.
VIL has also launched GIGAnet, its new integrated 4G network. “GIGAnet is the result of the largest network integration and the first-of-its-kind spectrum refarming exercise in the world. It deploys India’s largest artificial intelligence (AI)-powered massive MIMO sites, and has the country’s largest deployment of universal cloud, making it a future-ready, new-age, dynamic network to accommodate the enormous amount of data traffic that the post Covid-19 world has seen,” notes a VIL press release.
As per the telco, GIGAnet has the largest spectrum portfolio and huge capacity, and is being built on many principles of 5G architecture that will help in delivering a superior network experience.
The jury is still out on what the future holds for VIL. Industry analysts note that the planned fundraising, if successful, will merely help address the telco’s cash flow needs till the next fiscal. VIL will have to make annual investments of up to $2 billion in the network. Meanwhile, AGR and other statutory payouts along with the telco’s excessive debt burden will mean that the telco’s resources will continue to deplete.
That said, the clarity on the AGR front should help VIL in evincing interest from the investor community. The telco has a strong and technologically advanced network, not to forget its big play in the business-to-business (B2B) segment. A strategic investment from a global technology giant such as Amazon or Verizon, both of which have been reported to be in talks with VIL, could prove to be a real game-changer.
The Supreme Court verdict may have averted immediate bankruptcy for the company, but it will still have to sort out key issues to ensure business continuity in the long run. The challenge at hand is to stem consumer losses and shore up revenues while pumping in money into network upgradation and modernisation. 5G is already round the corner and VIL would have to dedicate substantial investments for network planning to stay relevant in the telecom space.
With the recent brand makeover, VIL is looking at a fresh start. But a mere facelift cannot yield revenues. For that, several other measures will need to be taken, both operationally and financially.
By Akanksha Mahajan Marwah