Can Vodafone Idea survive?

The biggest hurdle in the way of its long-term survival will be 5G, which has changed the telecom landscape and made it the weakest player in the sector

In the past two weeks, India’s beleaguered telecom operator Vodafone Idea (Vi) seems to have got a little more breathing space. The Government of India has cleared the long-talked-about plan to convert Rs 16,000 crore interest from the deferred adjusted gross revenue (AGR) dues into equity. This would make the Union government the biggest shareholder in Vi — holding about 33 per cent of the telecom firm.

Though the scheme to allow interest on AGR dues to be converted into equity was announced quite a while ago — and Vi had shown interest — the government was going slow. It wanted a firm commitment from at least one of the company’s two promoters — Vodafone Plc or the Aditya Birla group to fresh capital infusion. The Aditya Birla group has promised to put in money and the government therefore greenlighted the conversion. As the telecom minister pointed out, the government wanted three good players in the sector and not a two-horse race. The money being brought in by the Aditya Birla group would help Vi pay some of its lenders and in operational expenses.

On cue, the Department of Telecommunications (DoT) has also approved Vi’s proposal for a staggered payment to clear its third quarter licence fee and spectrum usage charges.

Meanwhile, Vi’s shareholders have approved the proposal to issue Rs 1,600 crore worth of optionally convertible debentures (OCD) to vendor American Tower Corp (ATC), according to a regulatory filing. According to reports, Vi owed about Rs 2,000 crore to ATC and with the issue of OCD, the tower firm would end up financing the money Vi owed it.

The reprieve that Vi may get because of these steps is likely to be short though. The conversion of the interest on deferred AGR into equity is only the interest portion of what it owes the government. The AGR dues it has accumulated are not going away. The Aditya Birla group’s capital infusion will help to an extent — but it is not going to be enough to fight on equal terms with rivals Reliance Jio and Bharti Airtel, both of which are in a better financial position than Vi. The OCDs being issued to ATCs will reduce only a portion of its operational debt; it will not leave it clear and free. All these steps will only help reduce Vi’s net debt of Rs 2.2 trillion by a small amount.

It will still need to raise fresh debt — to improve its operations and upgrade to 5G properly. It reported a loss of Rs 7,990 crore in the third quarter — and there are little signs that it will return to profits anytime soon.

The biggest hurdle in the way of  its long-term survival is 5G, because of the way it is changing the telecom landscape. As the telecom sector moved from 2G to 3G and then 4G, what was a predominantly voice-driven sector has become a data business with voice riding on it. This is one reason why Reliance Jio, which started with 4G and created a data backbone on which all its telecom services will ride, has an advantage over older players who had legacy 2G and 3G services.

Jio’s entry with 4G technology while skipping the entire voice market saw a number of the erstwhile big players from Reliance Infocomm to Aircel bite the dust. If Vodafone and Idea had not combined forces to become Vi, it was likely that they too would have been out of business by now.

But the joining of hands did not really change the long-term prospects. Vi became, very briefly, the largest telecom company by number of subscribers but its underlying problem did not go away. And since then, it has fallen behind Reliance Jio and Airtel and is losing subscribers despite its best efforts.

The 5G problem for Vi is much worse because it has fundamentally changed the market in which it is operating. The entrance of 5G and the policy changes accompanying it allow new, non-telecom players to provide services and solutions — especially to the lucrative corporate and enterprise segment. Traditional telecom players, Airtel, Reliance Jio and Vi, will jostle for a slice of the market with Cisco, TCS, Nokia, Facebook and Adani for the enterprise or captive non-public networks (CNPN).

In terms of technology and legacy operations, Vi will have no particular advantage over any of the newcomers. At the same time, at least some of the new players will have stronger finances than Vi.

Reliance Jio and Bharti Airtel are in a better position to tap the enterprise markets than Vi — partly because they have stronger balance sheets and partly because they have fibre optic backbones and offer high-speed broadband services to many corporations already. Vi would find itself to be the weakest player in the 5G space.

It would limp along for some more time, but the odds are stacked against it because of its legacy problems and the way the telecom market is evolving.

The writer is former editor of Business Today and Businessworld, and founder of ProsaicView, an editorial consultancy