After the merger, Vodafone Idea (VIL) may have achieved the top position in terms of subscribers and revenue, but their highly leveraged position with a combined debt of around `1.09 lakh crore will constrain their capex which will not be able to match up to Bharti Airtel and Reliance Jio.
According to analysts, due to subdued capex the merged entity may find it difficult to hold on to its high Arpu (average realisation per user) data subscribers because it would not be able to beef up its 4G network in comparison to Bharti Airtel and Reliance Jio.
According to Bank of America Merrill Lynch, the merged entity’s capex would be around Rs 14,000 crore for the next couple of years. In contrast the annual capex of Bharti Airtel is around `26,000 crore.
“The Vodafone-Idea merged entity will find itself constrained to invest in the business on account of high leverage,” brokerage firm Credit Suisse noted in a recent report. It said Idea’s stagnant 3G/4G subscriber base at 1.1 million net increase on-quarter, way below a monthly run rate of three million adds for Bharti and nine million for Jio, is worrisome.
“In spite of sharp cost cuts, we do not see the merged entity’s annual Ebitda crossing Rs16,000 crore for the next three years. Net debt is high (Rs 93,000 crore after Indus sale, 8.5x FY19 Ebitda). We believe interest payouts will eat into more than half of Ebitda generated, allowing little room for capex. At a time when peers (with lower revenues) are investing much larger amounts, this could lead to market share loss for the merged company,” Credit Suisse stated.
Analysts said the merged entity’s first priority would be cost savings rather than scaling up investments and that will be a cause of worry in a market in which Bharti Airtel and Jio are scaling up investments.
Vodafone Idea (VIL) has revenues of `58,500 crore for the 12 months to June 30, 2018, against Bharti Airtel’s Rs51,575 crore for the same period.
While VIL is losing revenues, Bharti is now seeing stability and Jio continues to march ahead, say analysts. Also, it has the lowest Ebitda or operating cash flow with Ebitda margin below 15%, they said.
According to analysts at CLSA, even as the merged company is funded for a peak competitive intensity, it will have Rs10,000 crore in incremental funding needs (besides debt repayment). “The merged firm’s gearing, at a 6.6x Ebitda even by FY21, will still remain uncomfortable,” they said.
As on June 30, 2018, VIL had net debt of over Rs 1.09 lakh crore and combined cash balance stood at Rs19,300 crore, the Ebitda for the company for the 12 months ended June stood at Rs10,700 crore. More than 80% of the net debt is owed to the Indian government and is without covenants, the company had said in its statement after the merger completion.
Individually too, the capital expenditure by Idea Cellular and Vodafone India has seen a decline. The capex which had been growing till FY17 saw a decline in FY18, as Rs 7,000 crore by Idea and Rs 7,251 crore by Vodafone during the year was lower than their spend in FY16 as well as FY17. In fact, Bharti Airtel’s capex in FY18 rose to Rs26,818 crore from `19,874 crore in the previous fiscal.
The completion of the Vodafone-Idea merger was announced last week, which made the combined entity India’s largest telecom operator, with nearly 408 million customers. Following completion, Vodafone will own a 45.2% stake in Vodafone Idea and Aditya Birla Group will own a 26% stake, both on a fully diluted basis. Vodafone will also separately hold a 29.4% stake in the combined entity resulting from the merger between Bharti Infratel and Indus Towers. The chairman of the board of Vodafone Idea is Kumar Mangalam Birla and former Vodafone India COO Balesh Sharma has been appointed the CEO of the company.