Vi needs more funds to succeed Heavy load
Amid heightened competition in the telecom sector, raising funds is crucial for Vodafone Idea Ltd’s (Vi) survival. However, investors were visibly disappointed after the company announced that the board of directors had approved a fundraise of up to ₹20,000 crore through equity or equity-linked instruments, causing Vi’s shares to plunge almost 14% on Wednesday. What gives?
One of the company’s promoters will participate in the proposed fundraise and is likely to invest about ₹2,000 crore. This means that 90% of the funding will have to come from external investors, on which there is insufficient clarity at the moment. Sure, the fundraise was on the cards, and investors seemed to have factored that in, going by the 82% rally in the stock over the past six months (as of Tuesday). However, uncertainty prevails after the recent announcement, which perhaps explains the huge fall in Vi’s stock price on Wednesday.
“VIL’s earlier attempts to raise funds have not been successful despite the company being in a better financial position than it is now,” said Vivekanand Subbaraman, an analyst at Ambit Capital.
“Also, the funding announcement lacks details and thus investors are perhaps sceptical of VIL’s ability to raise funds,” he added.
Vi is also looking to raise funds via debt, and hopes to bring in ₹45,000 crore through a combination of equity and debt.
If the company does manage to raise funds, it plans to expand its 4G coverage and roll out a 5G network.
If and when the fundraise goes through, the company will take another six to seven months to roll out 5G.
Its peers Bharti Airtel Ltd and Reliance Jio have already rolled out their 5G networks.
This network expansion could curtail the drop in Vi’s subscribers.
In the December quarter (Q3FY24), the company lost 4.6 million subscribers, compared to 1.6 million in the JulySeptember quarter.
However, average revenue per user (Arpu) grew 2% sequentially to ₹145, aided by a change in the entry-level plan and subscriber upgrades.
Hemang Khanna, an analyst at Nomura Financial Advisory and Securities (India), wrote in a report on 27 February, “If VIL is able to tie up the entire fundraise, it will be a material positive. However, VIL will not be fully out of the woods, in our view. Repair, recovery and rollout of 5G will take time to fructify and will be crucial to an improvement in its outlook.”
To be sure, the proposed fundraise is too small to turnaround VIL’s balance sheet, given its heavy debt burden.
As of the end of December, its net debt stood at a whopping ₹2.1 trillion. For perspective, the company’s annualized Ebitda in Q3 was around ₹8,600 crore. It will have to pay off about ₹40,000 crore debt annually from FY26.
Besides the potential fundraise, growing the Arpu is also crucial to Vi’s profitability.
Remember, the company is currently running in losses. Migration from 2G to 4G would support Arpu growth, but to compete with giants such as Airtel and Jio, expanding its network is essential.
According to news reports, Vi is likely to opt for a follow-on public offer for the equity fundraise.
The company plans to have a shareholders’ meeting on 2 April to approve the funding, and it expects to complete the equity fundraise within the next quarter.
If these efforts bear fruit, investor sentiment will improve.