Vodafone Idea is on the verge of a crisis: What went wrong with the telecom major?

The future of Vodafone’s India operations is critical, said Vodafone Group CEO Nick Read. India had been "a very challenging situation for a long time" on the back of higher taxes and unsupportive regulatory environment, said Read.

India's telecom industry has made massive strides in the last few years with the roll-out of nationwide 4G and increasing subscriber base. With hundreds of millions of subscribers, India should be a hotspot for companies. Alas, that hasn't been the case.

The industry barely has three players left thanks to Jio's blitzkrieg of 2016. Discounted rates can be affordable for a new player like Jio because of its cash-rich parent Reliance. But the same can't be said about others.

Jio is now India's largest telecom operator with more than 330 million users. It acquired all of these customers within a short span of three years. While it added a huge chunk of users from rural regions, a huge proportion of these users ported in from other operators.

The current average rate

 for 1GB of 4G data is $ 0.26, while it costs $12.37 in the US, $6.66 in the UK, and a global average of $ 8.53. Adding to this, India’s airwaves (spectrum) are among the costliest in the world. In 2015, the government raised a record revenue of at least Rs 1 trillion ($14 billion) that will be paid over the coming years.

Last year, Vodafone-Idea's share was listed at Rs 23.41 (October 1, 2018), today it's at Rs 5.55. Investors who bought shares in the company’s rights issue at a seemingly low price of Rs 12.50 just five months ago have lost nearly 50 percent of their investment.

How can a company run successfully when operating costs are sky-high and profits are non-existent? Vodafone-Idea has a long list of problems to solve!

In a bid to take on the juggernaut called Jio, Vodafone India merged with Idea Cellular to form India's largest operator with more than 400 million subscribers last year. The merger took a year to complete and was expected to provide more firepower against the other two players.

However, subscribers left Vodafone-Idea in hordes. The company lost 14 million subscribers in the June quarter, taking the losses in the past year to about 115 million users. The month of June ended with Vodafone-Idea having just 320 million users.

However, the merger failed to solve both the company's existing issues. Total debt now stands at more than Rs 1 lakh crore and their ARPU (Average Revenue Per User) is lowest in the world at Rs 108, while Jio and Airtel are at Rs 124 and Rs 129, respectively.

Vodafone-Idea has been in the industry for decades and has sufficient experience in deploying new technology. But with the 4G transition, both were stormed by Jio's instantly available 4G infrastructure. The carrier relies on conventional technology for voice calls while Jio had deployed VoLTE (voice over LTE) since the beginning.

This gave Jio a huge lead in terms of call quality and operating expenses were lower. Adding to this, Jio was the first operator in India to make phone calls completely free because they came bundled with the 4G data pack. Vodafone-India couldn't immediately offer this without taking a hit on operating expenses.

Integration of Vodafone India and Idea's network hasn't been a smooth journey as well. There have been multiple outages and customer complains about frequent call drops, slow data transfers and poor coverage. A decade back, Vodafone India was known for its solid reach and superior offering, but the same can't be said now.

In comparison, Airtel has shifted focus and wants to improve its ARPU instead of adding subscribers. According to OpenSignal , Airtel leads the charts with an average download speed of 8.7 Mbps, followed by Jio at 6.3 Mbps. Vodafone and Idea (as separate entities) were at 5.9 and 5.4 Mbps, respectively.

JM Financial said in a note to clients that Vodafone Idea has around 150,000 unique 4G sites, compared with Jio’s 260,000+ sites.

Vodafone-India cannot even improve or invest in improving its service offering now because of huge debt and the absence of working capital. Vodafone-Idea's capital expenditure in the quarter stood at just Rs 2,840 crore, lower than even Q419 (Rs 3,200 crore). Vodafone-Idea’s net loss narrowed to Rs 4,873.9 crore for the April-June quarter,

On an analyst call, the company hinted that it'll be conservative with the expense since their shares have been on a free-fall for months. Any more expenditure will inch the company close to a crisis. But curbs on investment hurt customer experience and lead to subscriber churn.

It can be concluded that the merger was short-sighted and lacked direction. Instead of solving each other's problems, they ended up consolidating them. Right now, winning hearts of loyal customers should be a priority to prevent an exodus, but the company is busy concentrating on network integration.

They are also running two huge brands under one umbrella. These factors actually increase operating costs and efficiency is nowhere to be found.

Vodafone-Idea expects the sale of its 11.15 percent stake in Indus Tower to complete in the next three-four months which could yield an estimated Rs 6,000 crore. The board of directors of cleared the planned Rs 25,000 crore rights issue at a price of Rs 12.50 per equity share.

But, these sources shall only last for a few quarters. In the longer game, Vodafone-Idea will require more capital to go up against the might of Jio and Airtel.

Vodafone (UK) has a 45.1 percent stake in the combined company. This is after transferring a 4.9 percent stake at Rs 110 per share to Aditya Birla Group for Rs 3,900 crore in cash. Aditya Birla Group now owns 26 percent of the combined company. The remaining 28.9 percent is owned by Idea shareholders. In this structure, no party is interested in investing further.

There could be some relief if the government decides to save the distressed telco by extending the moratorium on spectrum-related payments. After all, a majority of the company’s debt is owed to the government for spectrum.

Vodafone-Idea has been seeking a two-year moratorium on its annual spectrum payment citing debt and stress on the balance sheet. According to a report in The Economic Times, Vodafone Group Chairman Gerard Kleisterlee and chief executive officer Nick Read met with telecom secretary Anshu Prakash and asked for a refund of Rs 32,000 crore of input tax credit.

Telecom minister Ravi Shankar Prasad has refused to intervene in raising tariffs that have been dirt cheap since 2016.

India is already facing a credit crisis and major financial institutions such as DHFL, IndiaBulls and Yes Bank have been affected. 2019 also witnessed the shutdown of the country’s first private airline, Jet Airways.

Sinking of a two-decade-old telecom operator because of a tariff war and expensive spectrum won't be encouraging for foreign investors. In the best-case scenario, Vodafone-Idea will operate as a regional carrier.

On the contrary, public-sector units like BSNL and MTNL will get a Rs 74,000 crore bailout. BSNL is one of the country's biggest loss-making PSUs, while MTNL is the third-highest loss-making PSU. Divestment in these units will not have any takers and shutting them down may cost up to Rs 1.2 lakh crore.

Disclosure: RIL, the promoter of Reliance Jio, also controls Network18, the parent company of CNBCTV18.com.