Vodafone Idea's aggressive fundraising signals pricing war here to stay

Vodafone Idea Ltd’s (VIL’s) recent fundraising plans signal that telcos are unlikely to mellow down the pricing war anytime soon.

Analysts feel that with fresh capex plans by telcos, the market would witness an increased competition and the average revenue per user (ARPU) would continue to remain under pressure.

Vodafone Idea has indicated during its maiden quarter results (September quarter) post the merger that it intends to raise Rs 250 billion to execute its market strategy. Analysts feel capex spends by telcos are likely to reach new highs as chief aggressor Reliance Jio has indicated further spend, while Airtel will focus on higher capex spend on different areas of the business.

Vodafone Idea has pointed out a Rs 250-billion equity infusion in addition to tower and fibre asset monetisation plans to continue the capex flow. Industry watchers see this as an indicator of extended competitive intensity and further price wars. As such VIL’s capex spend remains significantly lower than its peers. Its Q2 proforma capex spend at Rs 33 billion was lower than Airtel’s Rs 76.8 billion in the same quarter. Jio’s capex remained elevated at Rs 160 billion.

The telcos, however, have high net debts: VIL at Rs 1.12 trillion as of Q2FY19, Airtel at Rs 1.18 trillion and Jio at Rs 1.7 trillion.

Analysts feel that even after an equity infusion of Rs 250 billion, VIL's net debt would remain high. “Obviously, VIL has noted the kind of investments it will require to sustain in this competitive market situation and has made provisions for funds accordingly. However, the larger concern would be the net debt even with the Rs 250 billion infusion,” noted a telecom analyst who did not wish to be quoted.

Given that Jio has parent RIL infusing funds endlessly, the competitive intensity in the market is likely to continue for another year or so for the telcos, the analysts observed.

Around Rs 182 billion of VIL’s Rs 250 billion fundraising plan would come from the promoters, parent Vodafone and Aditya Birla Group. While VIL will soon address queries on how the capex will be utilised, Airtel has already guided on capex spend towards improving network coverage, fibre assets, fixed broadband, and refarming. Jio has indicated that by the end of the year capex spending will shift to fibre-to-the-home services.

“We are not sure if FY19 will mark the peak capex for India wireless as capex will depend substantially on data pricing and consumption trends. If data consumption were to double year on year from current levels over the next 3-4 quarters, then we may well not see the peaking of capex in FY19,” noted JP Morgan analyst Viju George in a report post Airtel earnings last month. However, aggressive capex spend and subsequent aggressive pricing by VIL will be a matter of concern for Airtel. Interestingly, since VIL announced plans to monetise its tower and fibre assets during its September quarter results, industry watchers see a possible opportunity for Bharti Infratel emerging out of the sale, according to news reports. “The firm has an option to monetise its 11.15 per cent stake in Indus, which currently has an implied value of Rs 53.7 billion,” VIL said in a statement during the results. The firm added that they would actively explore a potential sale of its fibre network consisting of over 156,000 Km of intra- and inter-city fibre routes that would provide further balance sheet flexibility.

According to reports, the fibre assets could be valued around Rs 30 to 35 billion.

On a pro-forma basis, VIL reported loss of Rs 49.7 billion and Rs 120.2 billion revenue in the September quarter, which was largely impacted by a loss of 13 million customers and a below estimate average revenue per user (ARPU) of Rs 88.