Loan recast, fund infusion by promoters key to keep Vodafone-Idea afloat

Analysts say restructuring of bank loans under June 7, 2019 norms possible if only promoters agree to bring cash to the table or a new investor

Just as the verdict on AGR (adjusted gross revenue) was pronounced by the Supreme Court, Vodafone Idea’s (VIL) stock plunged over 14 per cent intraday, and along with it took the Nifty Bank index and the two key private sector bank stocks — IndusInd Bank and IDFC First Bank.

While IndusInd Bank's stock recouped much of the losses subsequently, IDFC First Bank didn’t find similar luck. Ironically, IDFC First Bank has the highest provisioning (70 per cent of loan outstanding) among those exposed to VIL. “Since some of the banks have made provisioning towards VIL in varying measures, the AGR verdict on the face of it isn’t negative for banks,” says Pritesh Bumb, banking analyst at Prabhudas Lilladher. However, for those with larger exposure to VIL, Bumb feels their asset quality will require greater monitoring.

The way ahead for VIL will likely depend on the willingness of its promoters —Vodafone Plc and Aditya Birla Group -- to plough capital into the company, as well as the telco's ability to raise tariffs. Analysts say restructuring of bank loans under June 7, 2019, norms will be possible if only its promoters agree to bring cash to the table or a new investor into the company. The need for restructuring the loan is seen eminent given VIL’s ailing financials: Its revenues have been on a weak footing for several quarters. The company has been incurring operational losses (also steadily bulging every quarter) for six straight quarters. Also, VIL bears higher annual AGR liability compared to Bharti Airtel. Of the AGR dues of Rs 58,000 crore, VIL has paid only Rs 7,900 crore so far; Bharti Airtel’s balance is about Rs 24,000 crore.

 

 

As Rusmik Oza, executive vice-president, head of fundamental research, Kotak Securities, explains, without an across the board tariff hike, VIL could be hard-pressed to make the outgo. 
 

However, now that the AGR liability is ascertained, analysts feel the banks may be more willing to rework VIL’s dues, provided its promoters is open to the option. Also, at this juncture, restructuring is opined as the most viable option to prevent loan exposure to VIL from turning bad. “Without restructuring and a tariff hike, it will be a matter of time that banks start facing asset quality pressure from the company,” says an analyst with a foreign brokerage.

The ball clearly is in VIL’s court. In which direction they strike should be known in the coming weeks. Until then, banking stocks exposed to VIL could remain on the tenterhooks.