Vodafone Idea’s FPO: Good for lenders, bad for shareholders?
Telecom company Vodafone Idea’s ₹18,000-crore follow-on public offer (FPO), if successful, would be good news for its lenders but not its shareholders. While existing lenders would have improved visibility on repayments, there could be a fresh lending opportunity of ₹25,000 crore as the company intends to raise new debt using the elbow room provided by the fresh equity.
One of the FPO’s objectives is to expand network coverage by spending ₹7,030 crore on 4G and ₹5,720 crore on 5G. An analysis of capital expenditure (capex) per site shows that Vodafone’s cost of setting up 4G and 5G is similar at ₹25 lakh.
Even with 5G technology available, the company is still following the strategy of expanding its 4G network. This could be because larger rivals such as Jio and Airtel have so far been unable to monetise their relatively small 5G user base (just over 15% of their total subscribers), and 5G growth has been muted as most compatible handsets cost over ₹10,000.
As 5G handsets become more affordable and the technology offers more use cases such as Internet of Things, the company will again have to incur capex on upgrading to the new network. With internal accruals barely enough for annual debt servicFY23, ing, Vodafone may have to again raise fresh funds via equity or debt to migrate to 5G.
The best-case scenario for the company would see it lose no more subscribers and match the industry's average revenue per user (AR PU ). Its subscriber base at end December was 215 million, with 126 million 4 G users, with an AR PU of ₹145. By expanding the network, it may be able to halt customer migration and raise ARPU.
The industry ARPU could rise 25-35% to ₹250 if there is a tariff hike after the elections and higher data consumption from 5G. Should it catch up with industry ARPU after expanding its network, the company’s annual topline could be ₹66,000 crore and Ebitda of ₹33,000 crore with a margin of 50%. The Ebitda must be viewed in the context of the company’s annual interest burden of ₹25,000 crore for FY24, based on 9MFY24 data. This means there may be no surplus funds for growth or for shareholders. The company has to pay ₹2 trillion in spectrum dues and the government’s share in adjusted gross revenue in the five years from FY27 to FY31, or ₹40,000 crore a year. It's likely Vodafone will fail to meet its debt repayments, and the government may convert some of its dues into equity. This would bloat Vodafone Idea’s equity base further after massive dilution of nearly 35% post the FPO, assuming allotment at ₹ 10, the lower end of ₹10-11 price band.