THE ONGOING DOWNWARD SPIRAL OF VI: A CAUSE FOR CONCERN
Monday, Mar 20, 2023
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Introduction
As we enter 2023, the future looks uncertain for Vodafone Idea (Vi), the once largest telecom operator in India. This year will be a decisive one for the telecom sector, and Vi has much to contend with in order to adapt to the changing times. Despite years of struggles, this year may bring about a turning point for the company.
According to CLSA, a brokerage firm, 2023 will be a crucial year for Vodafone Idea (Vi) as data adoption, tariff hike-led revenue growth, and 5G rollouts will be the key factors to watch. In its outlook on the telecom sector, the firm stated that 2023 will have three trends to watch out for in India’s mobile market, including 5G rollouts and monetization led by top-end subscribers. Vi’s financial crisis is ongoing, with delays in fundraising and pending conversion of four years’ interest on the spectrum and AGR payments into equity for the government, and the company is in urgent need of around Rs 24,000 crore to pay immediate dues. The report also states that Bharti Airtel and Jio together control 77% of the market share and will continue to gain share and predicts tariff hikes and Reliance Jio’s IPO as events to watch. It also notes that private networks may eat into 5G operators’ enterprise service opportunities.
Key Factors Contributing to Vi’s Financial Crisis
One of the major issues for Vi is the ongoing confusion surrounding tariffs. (Tariffs are charges imposed by a company on its customers for using its products or services. These charges can be based on a variety of factors, such as the type of product or service, the quantity used, or the location of the customer such as a telecommunication company imposing different tariffs on different phone plans. They are established through negotiation with regulatory bodies and can change due to market or government factors.) The CEO of the company has spoken about what he believes should be the industry standard for tariffs, but in reality, the company has lowered tariffs even further. This has left investors and customers perplexed about the company’s stance, as their actions do not align with their words.
Another concern is the lack of concrete investments for Vi. The year 2022 has seen various reports of potential investments, but there have been no updates or confirmations from the company, unless specifically requested by the Securities and Exchange Board of India (SEBI).
Additionally, Vi has seen a continuous loss of subscribers for over 12 months now, as reported by the Telecom Regulatory Authority of India (TRAI). Furthermore, the company has experienced employee churn, as employees are becoming increasingly concerned about the company’s future.
Furthermore, Vi has been facing mounting losses, with a loss of Rs 7,592.5 crore reported in Q2 FY23, and it is unclear how the company plans to recover from these losses and make profits, especially at the current industry tariffs. Lowering tariffs has not helped the company to fix the subscriber loss, and even the company’s priority circles, which were once emphasized, are now losing subscribers each month and they desperately need more funds by February 2023. Goldman Sachs predicts that Vi may experience a potential cash shortfall of 6,400 crore rupees by September 2023, when a debt repayment of 9,600 crore rupees is due. Without raising any capital, the company’s average revenue per user (ARPU) will have to increase by 35 rupees for it to meet its repayment needs, including capital expenditures, debt, and interest expenses. Currently, Vi’s ARPU was at 131 rupees in the September quarter. In the future, the brokerage estimates that Vi’s ARPU will need to increase 2.5 times to 356 rupees by the fiscal year 2027 for the company to have a neutral free cash flow when all of its AGR/spectrum repayment obligations resume.
Major Challenges Ahead
Promotors: Vodafone UK
The future of the company is currently in the hands of its promoters. Incase of if Vodafone UK to infuse capital, the government has stated that it will proceed with the equity conversion process, which would make the government the largest stakeholder in the company. However, if the promoters do not infuse further capital, it will hurt the funding plans of the company.
Tariff Hikes
Tariff hikes may seem like a solution for Vodafone Idea (Vi), but it is not a long-term fix for the company’s main problems. The main issue for Vi has been the inferior customer experience provided by its networks, not just the tariffs. While Vi’s networks have been awarded as the fastest 4G networks in India, there are other factors that contribute to a good network experience such as latency, video experience, 4G availability and coverage. Even if the company were to raise tariffs by 50%, it would not solve its main issues, such as reducing subscriber churn, paying off debts to vendors and lenders, and funding network expansion.
Enterprise Revenues
Vi has an opportunity to sustain itself by focusing on its enterprise business, which has been growing in demand. The telco has built partnerships with several companies and start-ups, and also offers B2B services in partnership with major corporations. If the enterprise business continues to grow, it can strengthen Vi’s financials and position.
The Indus Towers
Another important issue to keep an eye on is whether the company is paying off its dues to Indus Towers, as they have warned that they may lose access to their towers if the dues are not cleared. This would affect millions of customers across the country and would be detrimental to Vi.
Conclusion
All of these issues have led to speculation that Vi is at the brink of bankruptcy, and the company is currently trying to save itself. Despite a brief recovery of the Vi shares in December, the debt-ridden telecom giant seems to go in a downward spiral and 2023 could very well be a make-or-break year for the company and is possibly the final opportunity for the company to turn its fortunes around. However, without any significant improvements in the short-term, it is unclear how Vi will be able to turn things around.
Author Bio– Shreesh Singh is a financial market expert and analyst with case study skills and knowledge. His work clearly shows his passion and enthusiasm and we can feel it through his articles.
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