vodafone Idea

Vodafone India, the largest telecom player by subscriber base, faces ‘significant uncertainties’ according to its overseas parent from the recent Supreme Court judgement ruled against the industry in a dispute over the calculation of licence and other regulatory fees.

The October 2019 ruling by India’s apex court strained Vodafone India and other telcos off their finances. Already saddled with sluggish revenue growth and stiff competitive environment (Reliance Jio’s predatory pricing strategy) the SC judgement further impede upon their valuations.

Consequently, Vodafone Group’s chief executive Nick Read remains uncertain about the Vodafone India’s ability to generate the cash flow to settle its guarantees and liabilities, including dues related to license fee.

He has clearly stated that the Indian subsidiary remains in a critical situation. He has also pleaded with the Indian government to understand the current situation issue and the urgency.

According to the media reports, Read has issued an ultimatum to the Indian government saying that it will not provide more capital for its India business unless there are provisions allowing it to compete with Mukesh Ambani’s Reliance Jio.

Vodafone entered the market in 2007 via a multibillion-pound acquisition. Since then it has pumped in billions more, always hoping that the sheer scale of India would one day deliver returns to match.

In April this year, Vodafone and its Indian partner Idea together committed ₹18,250 crore by subscribing to the rights issue. Of the ₹25,000 crore rights offer, the promoter contribution comprises ₹11,000 crore from the Vodafone Group, and ₹7,250 crore from the Aditya Birla Group. The non-promoter portion of the issue received bids worth ₹8,700 crore.

The rights issue which opened on 10 April 2019 offered 2,000 crore new shares at ₹12.50 apiece, which is almost threefold of its current market price.

How will this development benefit other market players here?

While Vodafone Idea is now reduced to a penny stock, the key comments coming in just before the company’s Q2FY20 earnings results on Nov 14th clearly mean more trouble ahead.

According to our estimates, Vodafone will record a estimated net loss of Rs 4600 crs in Q2FY20 as compared to a net loss of Rs 4908 crs incurred in Q1FY20.

We expect churn for Vodafone Idea to continue amid integration led challenges and consequently expect a 10 million customer exit on a QoQ basis. With flattish ARPU at Rs 108, we expect overall revenues to decline 3.2% QoQ at Rs 10910 crs.

This weak competitive positioning and increasing losses coupled with the commentary coming from Vodafone’s Global CEO clearly means that both Reliance Jio and Bharti would gain at this development.

Hence it will not be any surprise that if fresh funding does not come from the Vodafone parent, both Reliance Jio and Bharti would benefit in terms of higher ARPUs which will mean more consolidation in the sector going ahead