Call waiting: How Vodafone Idea can claw its way back

The stock’s plunge on Friday was prompted by a gloomy report by the equities research wing of Goldman Sachs’ brokerage arm in India, which predicted an 83% downside for Vi shares from the previous day’s close. It maintained a ‘Sell’ rating on the company and raised the target price marginally to ₹2.5 apiece from ₹2.2 earlier. The report emphasized that Vi’s recent capital raise, while positive, was unlikely to arrest its market share erosion.

Vi had raised ₹18,000 crore ($2.16 billion) back in April through a follow-on public offer (FPO). Incidentally, one of the anchor investors in the FPO was the Singapore arm of Goldman Sachs. In addition, the telecom company’s promoters have put in ₹2,075 crore in additional equity.

The company also plans to raise more debt. Vi is in discussions with a clutch of public sector banks, led by State Bank of India (SBI) and Punjab National Bank (PNB), to raise ₹25,000 crore in fund-based or term loans, and ₹10,000 crore via non-fund based facilities or bank guarantees.

Separately, some of Vi’s dues to technology vendors Nokia and Ericsson have been converted into equity; past dues of American Tower Corp have also been converted to equity, while the arrears due to Indus Towers are being serviced by a payment plan.

Despite all this, however, the telecom operator continues to bleed and lose market share to its deeper-pocketed rivals, Reliance Jio and Bharti Airtel. While it has reported a revenue increase for three consecutive quarters, Vi lost market share in 16 of its 22 circles during the June quarter.

So, what will it take for India’s third biggest telecom operator—a distant third in a very diminished field—to turn itself around?

No easy fixes

On paper, some of the answers to Vi’s problems seem straightforward enough. To begin with, the company needs to expand its existing 4G network and launch 5G services quickly to stop customers from leaving its fold. The funds raised in the FPO are meant to do just that.

“They need to act fast and sign up vendors if they want to keep their customers," said a global level executive at one of the Big four consultancies, who did not want to be named. The delay in beefing up 4G services and launching 5G is going to cost Vi customers and revenue market share, he added.

Another game-changer would be converting its approximately 86 million 2G subscribers, who make up 40% of its 210 million base, to 4G services. Doing so would immediately boost its average revenue per user (Arpu).

Together, these two measures would open pathways to a larger share of the annual revenue pie of nearly ₹2.4 trillion, and take the fight to Airtel and Jio. As of the quarter ended June, Vi’s market share by revenue stood at 15%, way below Jio’s 42.7% and Airtel’s 38.3%.

Ankur Rudra, head of APAC (Asia Pacific) Telecoms and India TMT (technology, media, and telecommunications) Research at JP Morgan, spelt out his prescription for Vi to stay in the reckoning: “Exits from loss-making circles, better-than-expected conversion of 2G subscribers into 4G, driving Arpu improvement, lower network costs and market share recovery in key circles driving better-than-expected profitability."

Investing in infrastructure

Immediately, Vi is looking to deploy the funds it has raised to boost its network infrastructure. Time is of the essence here because the sooner it finalizes vendors, the quicker equipment can be deployed to improve its range and quality of service, especially in under-served areas. This, experts said, would address one of the key reasons for its subscriber losses.

The operator is in discussions with vendors such as South Korea’s Samsung, Finnish telecom gear maker Nokia, Sweden’s Ericsson, and US-based Mavenir to deploy 4G and 5G gear, said two senior executives aware of the discussions, who did not want to be named.

“The equipment deals with vendors for the enhancement and rollout of our 4G and 5G network infrastructure have taken slightly longer to finalize," a Vodafone Idea spokesperson said in response to questions from Mint. “However, we are now in the final stages of discussions and expect to close the agreements shortly."

During the company’s earnings call last month, Akshaya Moondra, Vi’s chief executive officer said, “Our limitation or constraint has been 4G coverage, which will be our priority and first focus area for expanding."

The CEO has announced a ₹55,000 crore capex plan for the next three years, to be spent on beefing up existing 4G networks across priority circles and to launch 5G services. Vi plans to increase the number of 4G sites from 168,000 to 215,000.

In the first quarter of this fiscal year, the operator added 6,600 4G towers to its network, at a much faster pace than the 917 4G sites it added in the previous quarter. These investments will be critical to claw back market share from Jio and Airtel. However, it still faces a challenge in lowering network costs, which have risen significantly over the past few years.

“All telcos now get their network equipment from European companies because the Chinese (Huawei and ZTE) have been barred from supplying due to security concerns. This has raised costs for everyone. We could have deployed the same number of sites that we do today for a tenth of the cost we pay now," said a senior industry executive.

Weaning 2G users

While murmurs of 6G have already begun to emerge from different corners of the world, nearly 20%—230 million—of India’s subscribers today are still 2G users, with the majority using feature phones—old-fashioned brick phones with very basic features. Of those 230 million, nearly 86.3 million are estimated to be in Vi’s fold, representing both a challenge and an opportunity.

Converting these subscribers to 4G will not be easy, but doing so successfully has a huge upside for Vi. In its latest investor presentation, the company has outlined its expectations of converting 41% of its 86.3 million 2G subscribers to 4G, which can give it three times their Arpu today. Vi’s Arpu stood at ₹146 in the quarter ended June.

To become 4G users, these customers will need to give up their brick phones and switch to smartphones. But that is easier said than done—despite India’s tariffs being among the lowest in the world, the cost of owning a smartphone is just too high for many of these customers. A 2G customer struggling to pay ₹180-200 a month to keep his phone running will find it hard to shell out ₹8,000-10,000 to buy a decent 4G phone, let alone an entry-level 5G smartphone.

Vi could initially target the sub-segment of 4G feature phones, said Tarun Pathak, research director at Counterpoint Research. “Around 40% of the current 2G feature phone users have reasons other than affordability to avoid shifting to smartphones," he said. “They include the learning curve to upgrade to a smartphone, vernacular challenges, lack of familiarity with the form factor, the need for a dependable device that lasts longer in tough conditions, as well as the need for elderly-specific and cheap, rugged smartphones." Addressing these challenges can help the carrier transition these customers, he added.

“The industry has witnessed a steady 10-20% year-on-year migration from 2G to 4G, driven by the availability of affordable smartphones. However, Vi recognizes the need to accelerate this transition," the spokesperson said. He added that the company was offering a voice plan at ₹99, providing a seamless entry point to basic data plans for customers upgrading to a new smartphone.

Debt overhang

While improving infrastructure and converting 2G subscribers can arrest subscriber losses and lift Arpu, Vi has a much bigger challenge ahead in reducing its debt burden. Currently, the carrier owes ₹2.09 trillion to the government— ₹1.39 trillion for deferred spectrum and ₹70,300 crore in adjusted gross revenue (AGR) dues.

The Goldman Sachs report highlighted Vi’s large AGR or spectrum related payments, due to start in FY26, and noted that the option of converting some dues into equity reside only with the government. It also pointed out that Vi’s free cash flows would be in the negative till FY31.

After the moratorium on spectrum payments ends next year, Vi will have to pay ₹23,400 crore to the government for FY26, and ₹45,400 crore each year from FY27 till FY31.

However, if the AGR dues are reduced 65% from the current ₹58,000 crore (in line with Vi’s self-assessed AGR liability), if penalties are waived, if tariffs keep rising, and if the government extends the moratorium on repayment of the spectrum dues, the value per share can rise to ₹19, Goldman Sachs said in its report.

Vi has filed a curative petition in the Supreme Court seeking relief from the court’s 2019 ruling. The ruling had stated that the non-telecom revenues of telcos had to be included in AGR for calculation of licence fees and spectrum usage charges payable to the government. It has also sought a waiver on the penalties for delayed payments.

Circle dilemma

Vi’s investor presentation in June showed that it counts 17 of the country’s 22 circles as priority circles, accounting for 98% of its revenue. It has a strong presence in Kerala, Mumbai, Gujarat, Haryana and Kolkata, which are its top five circles by revenue market share. JP Morgan’s Rudra believes Vi should focus its operations on profit making circles and exit the loss-making ones.

But another senior industry executive said such a move would be suicidal. “It’s a sure shot recipe for failure," he said, asking for anonymity. The moment Vi decides to move out of any circle, it would trigger a customer exodus because the perception would be that Vi’s services wouldn’t be available everywhere, said the executive. “Even if Vi were to do intra-circle roaming agreements (to use another provider’s network in a circle that it does not operate in), explaining the same to consumers will be a challenge," he explained.

Vi now has the wherewithal to derive economies of scale from the capex it has invested and will continue to invest, so moving out of any territory should not be considered, the executive insisted.“The idea should be to build it further, that’s why they’ve raised the funds and are getting more debt," he explained.

The good news is that Vi’s subscriber erosion seems to have been arrested to an extent. Its customer base stood at 210.1 million as of June, down from 221.4 million the same time last year. While that is a 5% decline, it is still an improvement from the steady decline it suffered in earlier years. In June 2023, it had suffered an 8% decline over the same quarter of the previous year and 8% in the June quarter of 2022 from the year before that.

Vi’s 4G customers, who pay more thanks to using much more data than 2G users, increased to 126.7 million as of June 2024 from 122.9 million the year before and 119 million in June 2022.

Despite the overall subscriber contraction, the company’s top line has been rising. In the quarter ended June, it clocked revenue of ₹10,508 crore, marginally lower ₹10,606 crore recorded in the quarter ended March. And its bank debt has halved to ₹4,600 crore from ₹9,500 crore last financial year.

“Our postpaid business, a major lever for Arpu growth, has shown consistent month-on-month expansion for over a year and continues to gain momentum," said the Vi spokesperson.

Aside from boosting Arpu, another upside will come from tariff hikes and the easing of the competitive intensity in the market, which has so far kept tariffs low. Jio, Airtel and Vi raised headline tariffs by 10-21% across all tariff plans in June.

In addition, Jio and Airtel charging more for 5G unlimited plans will pave the way for Vi to begin doing the same from day one of its 5G rollout, as opposed to offering them at the same levels as 4G plans, as Jio and Airtel did for nearly a year, said analysts. Vi’s 5G services are expected to be introduced by the year end.

“With tariff hikes already taken up, Vi is likely to continue witnessing growth, which may arrest the pace of market share gains for Bharti and Jio in the future," brokerage firm Jefferies said in a 2 September report.

Vodafone Idea is today at a crossroads in its journey. The Aditya Birla Group owned telecom services provider has a lot going for it and a lot going against it. Much will now depend on how its management navigates the challenges ahead. On how much slack the government, which owns a 23% stake in the company, throws it. And on how its rivals, Mukesh Ambani’s Jio and Sunil Bharti Mittal’s Airtel, respond to its efforts to boost its subscriber base.