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Brokerages on Vodafone Idea: 'Worst case, govt will become a majority shareholder'

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Vodafone Idea shares surged over 25 percent to Rs 11.17 as the government approved a relief package for the telecom sector. ICICI Securities believes the government's equity option will increase going concern visibility for VIL.

Brokerages on Vodafone Idea: 'Worst case, govt will become a majority shareholder'
Vodafone Idea (VIL) shares have leapt 25 percent after the government announced a telecom relief package, postponing the payment of spectrum and AGR dues for four years.
The government has increased deferred spectrum payments from two years to additional four years, meaning the payments will begin in FY26. Among telecoms, the spectrum burden on VIL is highest at Rs 1,060 billion. Reliance Jio is at Rs 656 billion and Bharti Airtel at Rs 627 billion.
Analysts said the moratorium will help VIL overcome upcoming payouts of Rs 170 billion in March-April 2022 and give it some breathing space. These steps also show, they said, the government's intent to keep the telecom sector a three-player market.
"We believe this major relief package and inevitable tariff hikes will improve the health of the debt-laded sector and India mobile will remain a three private player market," CLSA said.
The government has also encouraged sharing spectrum by removing additional spectrum usage cost (SUC) of 0.5 percent. It has permitted 100 percent foreign direct investment in the sector, instead of 49 percent under automatic route.
The package significantly reduces the payment burden on ailing telco, Vodafone Idea Ltd (VIL) by Rs 250 billion a year. "We think all telcos benefit from AGR redefinition, rationalisation of SUC, longer spectrum tenure (30 years instead of 20 years), and greater visibility on auction timelines (annual instead of monthly)," JPMorgan said.
However, from VIL's point of view, there is no relief on bank guarantees for existing dues. And while SUC is now 0, there is no relief on current dues and the payment date for dues remains the same, the brokerages said.


But the government has given the option to convert the deferred dues and interest on deferred payment into equity if need be. This total amount works to over Rs 1,000 billion for VIL.
In the next four years, the total equity conversion will be Rs 1,102 billion on the market cap of Rs 260 billion. If this conversion goes through, by the end of four years, VIL might be able to get rid of its liabilities. But this equity dilution will reduce the stake of existing shareholders. And when that happens, the government may become the largest shareholder of the company.
"The option for converting interest payments to equity for telcos and debt to equity for government provides a means for a permanent solution to VIL's debt crisis," JPMorgan said.
Analysts said, in the worst case, while the company could end up being owned majorly by the government, at least it would remain a going concern (and not shut down in the future).
"We believe this could pave way for VIL to become majority-owned by the government, thus increasing going concern visibility," ICICI Securities said.
However, for the company to survive, for now, there has to be "a substantial tariff hike". A hike would make its business operations financially viable.
Besides regulatory dues, VIL has to make a non-convertible debentures (NCD) payment worth Rs 60 billion. It needs to renew bank guarantees in the next 12 months. These guarantees are worth Rs 120 billion. And for reducing these liabilities, it needs an equity investor.
"It needs to get funding, both debt and equity, for accelerating capex investment and meeting other liabilities. And without tariff hike, securing funding will be difficult," ICICI Securities added.
Citi said the onus now shifts to the company to complete its capital raise and reinvest in the network. "The much-needed breathing room provides a material opportunity to the company to deliver on this, though challenges and uncertainties remain," it said.
CLSA said the moratorium will significantly cut VIL's urgency to raise tariffs in the near term as coming up is Jio's Smartphone Next launch on Diwali.
At 13:50, Vodafone Idea shares were trading at Rs 11.21 -- over 25 percent higher.
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