Vodafone Idea and the quest for atmanirbharta
India’s visionary former Prime Minister (PM), Atal Bihari Vajpayee, realised that the telecom sector was being suffocated, not by its inherent financial dynamics, but by his own government — through a deadly combination of frequent policy changes, bureaucratic repression, a rent-seeking approach, and regressive taxation. Being the statesman that he was, Vajpayee gambled by introducing the new telecom policy in 1999, despite an uncertain and highly volatile political environment and, with his courage of conviction, turned around the gloom and pessimism of the sector.
Today, India’s situation is similar. It has been compounded by rigid judicial pronouncements, deliberate misinterpretation of policy intent since 2008, and the continuation of misplaced political arrogance in the resolve to fundamentally correct things.
The structural telecom sector reforms announced by the Narendra Modi government seek to redress most of this in a thoughtful policy. The policy is brilliant in its thrust, and balances its immediate imperative of averting an imminent bankruptcy of Vodafone Idea (VI) along with fiscal prudence, while displaying astute management of the political optics associated with an intelligently camouflaged company-specific bailout using public funds.
The reform package effectively provides what VI (and its potential financial investors) always wanted: Policy certainty, medium-term cash flow accommodation, and a financial backstop through a government guarantee to be considered a “going concern”. The policy achieves all of these parameters, without either being company-specific or value destructive for public finances — a brilliant move.
I do not share the pessimism of analysts who call this policy a “faint ringtone” for VI, predicated on it transmuting to a government company in four years, or no accommodation currently being provided on its balance sheet and profit and loss account. Nothing could be further from the realm of possibilities that now beckon VI.
Both Bharti and VI have the scale, distribution, talent, and infrastructure assets to fully exploit the immense opportunities that the adoption of 5G provides at the intersection of the Internet of things (IOT), Artificial Intelligence, and cloud technologies. They lacked access to global capital, which Reliance astutely raised last year. The key transformative initiative that VI now needs to undertake is to reorient its business model from providing mere connectivity solutions to emerging as a “platform play” for business services — across diverse industries such as manufacturing, retail, health care — to retail and enterprise customers embedded in its network.
To achieve this, VI must plug into an ecosystem led by global technology behemoths who, among themselves (Amazon, Microsoft, Google, Facebook), are fighting this battle of ecosystems for “cloud” dominance in a market of a billionplus people connected by cell phones — especially after being deprived the opportunity in China.
Google’s Loon project with Telkom Kenya — of providing connectivity to remote, inaccessible locations through its aerial wireless networks propelled by high altitude balloons — is an example of the potential opportunities for VI.
Such an ecosystem will also need rich entertainment content, a payment platform, and access to retail consumers. Fortunately, the current environment has distressed, high-quality assets such as Zee, Future retail, and similar players whose survival in the emerging digital world will be determined by their linkages to participative ecosystems rather than standalone entities.
While making his defining comment in 2019, the exact words of Kumar Mangalam Birla were that “in the absence of relief from the Government it does not make sense to put good money after bad”. The relief provided by the government now will ensure VI has four years to design and implement a credible plan to improve its financial metrics through a host of potential measures for a strategic transformation.
For once, it has a strong ally in a statesmanlike Sunil Mittal, who has publicly supported the cause of a tariff hike across the telecom sector. Reliance will grudgingly agree as the government has indicated unequivocally its position on the perils of a duopoly. All VI needs is the infusion of sufficient capital to provide a financial runaway comparable to Reliance and Bharti to reengineer, execute, and flourish.
If KM Birla and Vodafone Group Plc demonstrate skin in the game for this new model of atmanirbharta, and make appropriate investments (even as a signalling mechanism), large capital infusion from global strategic investors — who are looking for a long-term play in India’s underexploited, commercially important billion-plus market — will follow. In the current ultra-low interest rate environment and a global hunt for yields, the embedded 30-year policy intent enunciated will be akin to investments in the US 30-year treasury bonds — with a far higher return on capital employed (ROCE).
The government has astutely provided a policy package that is based on the principles of an “earn-out structure” in deal-making, where the benefits to the target company are contingent on its satisfying post-deal milestones. In VI’S case, it has four years to achieve this — re-engineering its business model and returning to profitability based on multiple levers. In case it does not, then its transition to a government company is a given. But, given such an incentive structure, it is highly unlikely.
The sector no longer faces unsupportive regulations or the baggage of the past in terms of retrospective taxation. Under an excellent telecom minister, a fresh beginning beckons to make telecom, media, and technology once again the poster children of a modern self-reliant India envisioned by Rajiv Gandhi and Satyan Sam Pitroda in 1984, by Vajpayee in 1999, and now by Modi.
VI is a strategic asset and it must seize this opportunity.