How Voda Idea & TTML can stage a turnaround post debt conversion

Debt strapped Vodafone Idea and Tata-Group owned Tata Teleservices (Maharashtra) have decided to convert interest on deferred spectrum and adjusted gross revenue dues into equity, buying time to survive.
After the issuance of additional equity, the government will own nearly 36% stake in Vodafone Idea and roughly 9.5% in TTML.

While Vodafone Idea’s management has clarified that the decision-making power will continue to rest with the promoter group, and the govt has refrained from holding a seat in the Board, Tata Teleservices is yet to communicate details to investors. 
On the bourses, the shares of Vodafone Idea plunged 21% on Tuesday, but bounced back 8.5% on Wednesday, reflecting the confusion in the minds of market participants.
The shares of Tata Tele, too, were locked at the 5% lower circuit yesterday.
 
So, what’s worrying the Street and are these concerns even warranted?
We spoke to some analysts to demystify the concerns.
To begin with, the shares of Vodafone Idea will be issued to the govt at Rs 10 per share, which is about 22% lower than yesterday’s closing price. Those of Tata Tele, meanwhile, are likely to be issued at Rs 41.5 apiece, which is a staggering 85% discount to current levels.

The secpnd area of concern is large equity dilution in Vi and Tata Tele. According to Ambareesh Baliga, market analyst, it should be positive for Vodafone Idea as they are short of liquidity. Moreover, the government has assured that it will stay invested in Vi; hence providing stability to the company. However, if the govt books out post buying stake in TTML, it won’t come as a surprise.

Moving on to the third concern; Gaurang Shah, Senior Vice-President at Geojit Financial Services, believes a turnaround in growth outlook appears difficult as there is a large debt that remains to be serviced by the companies.

Analysts at Kotak Institutional Equities, too, expect the government to increase its stake in VIL further, as and when the cumulative deferred amount of Rs 92,000 crore pertaining to AGR dues and spectrum liabilities becomes payable post the end of the moratorium period.

So, how should investors play the telecom theme?
According to Baliga, retail investors should avoid TTML due to lack of clarity. Vi, on the other hand, can be looked at from short-term perspective due to govt backing. For Edelweiss Securities, Vi remains unattractive till it has a clear road-map to support ARPU growth.

Against this backdrop, price movement in these two companies, along with rival firms Bharti Airtel and Reliance Industries will be tracked by the markets today.
That apart, reaction to CPI inflation and IIP data, Q3 results of Infosys, TCS, and Wipro and global cues will sway the indices.

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