A tough call: Can VIL face the onslaught of rivals Jio, Airtel in 5G race?

Crippling debt, falling subscriber numbers, super-aggressive competitors and a government dragging its feet on a debt-to-equity conversion make the going tricky

Can Vodafone-Idea Ltd (VIL) face the onslaught of its rivals Reliance Jio and Bharti Airtel in the 5G race and manage to hold on to its customers as it battles growing financial challenges?

If the signals from the last week were anything to go by, this will be a tough ask. The company has three problems: Continuously shrinking subscriber numbers with rivals gaining at its expense; growing concern from its vendors (tower companies and telecom gear makers) over its delay in paying dues estimated by analysts at Rs 7,000 crore-8,000 crore; and its elusive effort to raise Rs 20,000 crore via strategic partners (frequent announcements of impending deals have come to nothing).

To add to the problems, nearly a year after the government announced that it would convert VIL’s dues of Rs 16,000 crore to equity, which would make it the owner of a third of the telecom company’s shareholding, the process is stuck. According to the Department of Telecommunications (DoT), there are some “technical issues” involved. Some industry analysts think the government is waiting for VIL to show its intent by raising funds before it takes the plunge.

Banks have made it clear that it will give VIL new loans for its 5G roll-out only after the equity conversion. The two major shareholders — the Birla group and Vodafone plc — have not helped matters by paying a negligible Rs 4,500 crore to cover the debt.

According to a report from the Telecom Regulatory Authority of India (TRAI) released last week, VIL was the only operator whose active subscriber base fell in August by 2.6 million, while that of Jio and Airtel collectively rose by 4 million. It also has the lowest visitor location register or VLR — which indicates active users — among private sector players. At 84.7 per cent in August, VIL’s VLR has been falling continuously from September 2021, compared to 98.3 per cent for Airtel and 91.8 per cent for Jio (also in August).

The story is repeated for net subscriber additions — Jio added 3.3 million, Airtel 0.3 million, but VIL lost 2 million net subscribers in August over the previous month.

Late last week, VIL’s board bought time by raising Rs 1,600 crore from the American Tower Corporation (ATC) via an optionally convertible debenture that can be converted into equity at par on a preferential basis after 18 months. The company owed ATC around Rs 2,000 crore and the tower company was reportedly considering legal options. Indus Towers, which is owed around Rs 7,000 crore, has reportedly asked VIL to pay by November if it wants to continue doing business.

A senior executive associated with the discussions on convertible debentures said, “The offer was given, as far as we know, to all vendors with dues. It helps in giving us some comfort as currently the dues are like an unsecured loan. Now at least the loan has been linked to equity, if VIL fails to pay, even though the value of shares won’t be worth much.” He added that telecom gear makers could not take up the offer because it would create a precedent across the world. Plus, there would be conflict of interest issues if a supplier takes equity in one telco when it supplies to competitors.

VIL top brass has made it clear that it will start work on 5G roll-outs once it can get funding from banks. It added that discussions with vendors to supply equipment are closed. Vendors said they are focusing on committed orders to Jio and Airtel and will supply VIL once their dues are cleared.

The VIL management itself has a different perception on 5G. In an interview to <Business Standard>, VIL Chairman Ravinder Takkar said 5G use cases are still up in the air. And VIL will use 5G spectrum to bolster and expand its 4G services.

Concentrating on 4G could be a plausible strategy for VIL. Some analysts reckon that the major shift to 5G will occur by mid-October 2024, because a significant roll-out will take longer than what operators claim. So VIL has a breathing space of two years to concentrate on expanding and augmenting 4G services, rather than compete headlong against tough rivals since it has much less 5G spectrum and in fewer circles.

It’s a calculated risk. Jio, for instance, is banking on the globally popular 5G use case in fixed wireless broadband (where the last mile would be on 5G wireless) combined with fibre-to-the-home broadband and is targeting over 100 million homes. These users have average revenue per subscriber or ARPUs three to five times more than mobile subscribers. VIL has not looked at this market seriously at all.

Jio and Airtel have also decided to woo customers to adopt 5G services without initially charging a premium over the 4G tariff to begin with for the commercial service. Monetisation will follow, said a senior Jio executive, once access to faster connectivity is established. It is no rocket science to expect VIL’s 119 million 4G customers, especially those on post-paid plans (with ARPUs two to three times higher than prepaid customers), to shift to rivals.

Experts point to one rider, however. The government, which earlier has nudged all telcos to raise 4G tariffs after its reform package last year, might intervene again. “It’s a possibility, as the government has taken a decision to support VIL and also BSNL’s 4G services, which are yet to be launched,” said one senior telco official.

This is part of the government’s efforts to ensure that there are at least three competitors in the industry plus BSNL and MTNL to meet the government's strategic objectives. Jio and Airtel may well baulk at this possibility since they have spent Rs 260,000 crore on 5G investments and need to get the ball rolling soon.

So, either the government needs to take a decision on the issue soon. Or VIL needs to raise money quickly and join the 5G race.