New Delhi: The much-anticipated fundraise by the beleaguered telecom services provider, Vodafone Idea (VIL), has created a buzz in the industry not just because the company’s ongoing follow-on public offering (FPO) — the biggest in the country’s history — augurs well for its survival, but also signals a positive trend for the sector at large.
If successful, the Rs 18,000-crore FPO, which was nearly 50 percent subscribed on Day 2 (Friday), will boost VIL’s cash flow, enabling it to invest in network expansion — especially in widening its 4G coverage and finally entering the 5G market — and reducing some of its debt.
An FPO is a process where a publicly traded company issues additional shares to investors after its Initial Public Offering (IPO). Companies may opt for an FPO to raise additional capital for various reasons, such as funding expansion activities, paying off debts, or improving their capital structure.
This is expected to not only increase the company’s competitiveness and slow its ongoing loss of market share, but also to significantly reduce the risk of a duopoly in the industry — something sector analysts, government officials and even other major telecom players have spoken about.
“The Indian telecom ecosystem, which has more than 1.1 billion mobile subscribers, necessitates the presence of three private telecom operators. A three-player market allows customers to choose from alternatives and ensures healthy competition,” said Ankit Jain, vice-president and sector head of Corporate Ratings, ICRA Limited.
Vodafone Idea has been struggling to raise funds amid mounting debt and eroding market share. The company, which posted a loss of Rs 29,301 crore for FY23, has failed to keep up with its competitors — Bharti Airtel and Reliance Jio.
For example, the company has yet to launch 5G services, a feat achieved by its two private competitors over a year ago. This has raised fears over the Indian market heading towards becoming a two-private player market.
“Telecom is an essential service and robust infrastructure is the key for development. The fundraising exercise by one of the operators augurs well for the industry, as this will allow the operator to incur capex towards network expansion, both for 4G and 5G services. This also benefits the tower companies in expanding tower and tenancy base, while managing receivable levels effectively, thereby providing cash flow stability,” Jain explained.
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Support from government
According to the Red Herring Prospectus filed by the company ahead of its FPO, it intends to process the fundraising towards strengthening its 4G network, setting up 5G sites and payment of certain deferred payments for spectrum to the Department of Telecom.
India’s biggest FPO has also seen support from the government — the largest shareholder in the company with over 32 percent stake — and the industry.
In an interview with CNBC-TV18 on 16 April, Finance Secretary T.V. Somanathan said that preserving competition with multiple operators in the market is a major policy goal of the government.
Stating that the government is happy to see the capital investment plans of Vodafone Idea, the finance secretary added: “India’s economic growth needs a thriving telecoms sector. We need multiple operators to preserve competition and protect consumers.”
“Preserving competition is a major policy goal of the government and is reflected in the September 2021 telecom package and the large capital infusion to BSNL,” Somanathan said.
Likewise, Bharti Enterprises Chairman Sunil Mittal in an interview with The Economic Times Friday reiterated that three private operators are “ideal for India”.
VIL’s funding strategy and market outlook
Vi is planning to raise as much as Rs 45,000 crore through a mix of equity and debt.
According to analysts, the fund infusion should enable VIL to narrow the 4G coverage and capacity gap with peers and ramp up network capex for 5G rollouts, helping arrest subscriber losses and enabling faster upgrades of 2G users to 4G.
In a research note this month, IIFL Securities, a capital market company, said, while earlier there was a 25 percent probability of India becoming a two-player market, “we now change to 100 percent probability of a three-player market.”
The funding, coupled with at least two rounds of significant tariff hikes of 15-20 percent each anticipated in the next three years, will help push up average revenues per user for Vodafone Idea.
“We believe that tariff hikes are imminent post elections…With the government keen on ensuring a three-player market, we do not see the regulator frowning upon tariff hikes,” IIFL Securities added.
Noting that successful fundraising “materially improves” the odds of a three-player scenario, Macquarie Group, a global financial services group, in a research note this month said this may be a temporary fix and challenges remain for the company.
It pointed out that the company will owe the government about $26 billion in Adjusted Gross Revenue due from March 2026 and deferred spectrum due from October 2025, with the government having the right to convert these dues to additional equity in the company.
The government share in the company currently stands at 32 percent and will come down to 24 percent post the FPO.
“Even if we assume a 20 percent step change in tariff followed by a 10 percent pa tariff compounding and no subscriber erosion, we estimate it would take Vi well over 20 years to organically pay back the government’s obligations; i.e. in the absence of government’s write-offs, this constrained cash flow and potential dilution dynamic remain a fundamental challenge,” Macquarie Group highlighted.
Meanwhile, Kotak Institutional Equities, in a note this month, added that the FPO is a step in the right direction albeit much delayed.
It noted that with enhanced network coverage, improved competitiveness and a sharp reduction in the company’s bank debt, “we believe Vi will be able to secure further funding from banks. While the fund-raise should improve Vi’s near-term fortunes, we don’t expect Vi to gain any meaningful market share from peers…”
(Edited by Richa Mishra)
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