The government’s delay in clearing Vodafone Idea’s (Vi) debt into equity is understandable. It probably faced a damned-if-you-do and damned-if-you-don’t kind of situation that governments all over the world face while delivering rescue packages to private companies. If it picked up a 33% stake in Vi in a hurry, there would have been an immediate political backlash, so some bit of playing the role of a hard taskmaster became necessary before deciding in favour of the inevitable. India could ill afford a duopoly in the telecom segment, and a bailout plan for Vi was the only option left. However, the 16 months of delay in the interest-to-equity conversion after the Union Cabinet’s approval has served little purpose, as it is still not known how much the promoters would invest in Vi. Given Vodafone Plc’s public statement that it would not commit any fresh funds to its India operations, the Birlas, the co-promoters of Vi, face a tough task ahead.
Vi lost 1.8 million gross subscribers in November 2022 over the previous month, with the loss at a net level of 2 million. This was the seventh consecutive month of active subscribers moving out of its network. The blended churn rate, a reflection of subscribers porting to other network service providers, has gone up from 2.9% in FY22 to 4.3% in FY23. Vi’s losses have risen substantially, and so has debt, partly because it is buying 5G spectrum under deferred payment. The government’s presence as the largest shareholder would, of course, come as a near-term relief to the company in terms of refinancing its loans and paying off dues to Indus Towers and ATC. But analysts feel it is not enough to overcome multiple challenges Vi is up against—be it debt, lack of investments in the network, or a smaller customer base. The total gross debt of the company, as on September 30, 2022, stood at Rs 2.2 trillion. Capital expenditure for nine months in 2022-23 was just Rs 3,260 crore—about 80% below Bharti Airtel’s India spend. With Airtel and Reliance Jio ramping up 5G and targeting pan-Indian coverage by December 2023/March 2024, it will add risk to Vi’s 21-million postpaid subscribers (who account for over 25% of revenue) since these high-end subscribers will likely steer 5G adoption in the country, CLSA estimates.
Now that the government has kept its side of the bargain, Vi promoters must shed their ambivalent stand so far and get going with their fresh capital infusion. To catch up with the kind of investments peers have made, Vi will need at least Rs 30,000 crore to start with. The long-term question for the telecom sector, however, goes beyond just Vi. India’s 5G spectrum price is 2.6x of Germany, 3.8x of the UK, and 4.4x of South Korea. In contrast, telecom service revenue is lower: just 0.6X of Germany, 0.7x of the UK, and 0.9x of South Korea. This means the pay-back is longer. The return on investment is smaller—compounded by high prices for network equipment as well in India. At the end of the day, companies should have enough funds in hand to be able to invest top dollars in the next-gen network. Lower spectrum fees, by themselves, should improve competition in the industry, and there is no denying that companies like Vi have been a victim of high upfront fees. The telecom industry needs investment in robust and reliable communication infrastructure to meet the rising demand for connectivity. Thus, the government shouldn’t kill the golden goose.
