Big breather for Voda Idea

Vodafone Idea Ltd has got a big breather, with the Cabinet on Wednesday clearing a proposal for giving telcos a moratorium on their adjusted gross revenue (AGR) dues as well as spectrum payments prospectively for the next four years. According to analysts, the move translates into a relief in the company’s cash outflow by over ~65,000 crore

However, with VIL losing market share month-on-month, will it be able to use the improved cash flows to upgrade its network (from 2G to 4G ) and get back on track?

To be sure, it has got much more than what it had asked from the government — another two-year moratorium only on spectrum payments.

The government also accepted taking equity as payment for dues.

Deutsche Bank says that the acceptance of this principal could generate a lot of confidence for VIL’S long term future — although shareholder dilution will likely keep the investing case somewhat questionable.

Analysts say even Bharti Airtel could go for the moratorium plan. It had dues of around ₹43,980 crore, out of which it has forked out ₹18,000 crore and needs to pay the rest in instalments. Airtel has to make spectrum payments of over ₹7,800 crore annually.

The firm recently decided to go for a rights issue of ₹21,000 crore to reduce its debt and also prepare for the 5G spectrum auction. CEO Sunil Mittal said his aim was to reduce firm’s debt to 2x of Ebitda. As for Jio, sources say because of its smaller AGR dues, the company has decided to pay the entire amount at one go. “So they would not be interested in a moratorium and pay over 8 per cent,” says the source.

According to Goldman Sachs, VIL will require about $9.5 billion of capital in the next four years to arrest its market erosion. And it will need as much as $12.8 billion if it also wants to be in the 5G game. With spectrum auctions to be held early next year, VIL has to participate or lose out.

Goldman Sachs estimates that thanks to the moratorium, the company will not have to pay over ₹16,200 crore annually as AGR and spectrum payments for four years, thereby improving its cash flow significantly. But it may still have to go for a tariff hike, increase its revenues and stop the tide of losing customers to improve its Ebitda. It will also need an investor to pump in about ₹25,000 crore, as its ability to absorb more debt is limited.

With the government increasing the licence period from 20 to 30 years for 5G and also providing a window to convert the additional interest to be paid during the moratorium into equity, it ought to be easier for VIL to get a partner.

But a senior executive of a telecom company says, “With the way they are loosing market share, it is just deferring their ultimate demise — unless they decide that the cash which they save will be put into network upgradation and get back customers. The question is, with low Ebitda incomes, can they do it?” Says Sonam Chandwani, managing partner, KS Legal: “Liability is only postponed, not erased. The banks might heave a sigh of relief as their fear of default is postponed. But it is unclear how VIL will pay its obligations and the additional interest in the moratorium period.” Though the big announcement was surely on the moratorium, the government has also made some other welcome changes. First, the rationalisation of the definition of AGR (by taking out non-telecom revenues from its purview) will reduce the licence fee burden for all telcos. It will make the bundling of phones easier.

Second, the simplification of rules for the permission to install new towers is also a welcome step. The DOT will now accept data on a portal based on self-declaration made by companies. Tower companies have to get 25-26 permissions from states, municipal corporations, various ministries, and so on, which can take as much as three to six months.

Third, the government has simplified other areas which have become contentious. For instance, in case of delayed payment of statutory dues like license fees and SUC, telcos only have to pay interest, which has been lowered. Moreover, the interest will be compounded yearly instead of monthly. In addition, telcos do not have to pay penalties or interest on penalties.

Fourth, spectrum sharing has become more attractive as the additional 0.5 per cent on SUC has now been removed.