Vodafone Idea needs fresh round of equity infusion by 2021, say lenders

All telecom firms to remain under stress despite tariff hike

Despite slashing its capital expenditure, Vodafone Idea would require fresh round of equity infusion from its promoters by 2020-21, as its cash, including proceeds from the Indus stake sale, would last only for the next 15 months.  

The company had raised Rs 25,000 crore in May this year via a rights issue in which promoters — Vodafone Plc of the UK and Birla Group — invested Rs 11,000 crore and Rs 7,250 crore, respectively, according to their shareholding in the company.  

The rights issue was priced at the rate of Rs 12.50 a share. Since the rights issue closed, Vodafone Idea’s share price fell by half to Rs 6.22 as on Thursday and bankers said the firm would need more funding to keep its operations going. Vodafone Idea owns 11.5 per cent stake in telecom tower company, Indus Towers, and expects to raise Rs 5,000 crore by selling the stake. 

The equity route is important as Vodafone Idea’s debt touched Rs 1.15 trillion as of March 2019, making it difficult to raise fresh debt, said global banking firm, Credit Suisse, in a report. 

A Vodafone Idea spokesperson declined to comment. Lenders said Vodafone Idea is not alone. These companies will find it tough to meet their cost unless they raise tariff significantly or raise fresh debt if they want to participate in the fifth-generation spectrum auction.

As of March this year, Bharti Airtel had a debt of Rs 1.06 trillion, while Reliance Jio had a debt of Rs 1.12 trillion. The deferred spectrum charges of the sector to the government were another Rs 2.95 trillion. 

On Wednesday, Jio passed on the interconnection usage charges of 6 paise a minute to its customers, thus, raising the prospects of a tariff hike by the sector and cheering shareholders of telecom firms. “We expect Vodafone Idea’s leverage (net debt to earnings before interest, taxes, depreciation, and amortisation, or Ebitda) to decline to 10.5x by 2021-22 (FY22) after the expected price hike, but it will still be higher than the globally acceptable levels of less than 4x,” said Credit Suisse.

Analysts said the financial health of the sector is fast deteriorating as the free cash flow generation remained negative for the sector in the past four years. This led to high leverage for the mobile operators, but the investments in the sector are likely to remain high, given the capacity requirements with surging data growth.

Bharti Airtel and Idea’s return on capital employed ratios are also down in the past five years and the companies are yet to recover their cost of capital. Credit Suisse said it does not see Airtel and Vodafone Idea earning cost of capital in the next five years. Analysts expect pressure on earnings to continue over the next two years, but expect strong recovery in Airtel and Vodafone Idea’s Ebitda from FY22, led by an improvement in mobile tariff.