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Vodafone-Idea is in a state of emergency; Everything you need to know about the beleaguered telco

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The rage has just begun!

Vodafone is one of the most easily recognisable brands in India and has been operating in India for decades. The company previously operated as “Vodafone India”, but merged with Idea in 2017 to take on the rising might of Jio.

Owned by Vodafone UK, the Indian division has witnessed a lot of corporate changes, ranging from a partnership with Essar to Hutchison. In fact, the network was previously called Hutch before Vodafone took over. It maintained a dominant position in the Indian market for quite some time but was completely derailed by the entry of Jio’s 4G infrastructure.

Vodafone (UK) said its future in India looks bleak as the operator owes billions in debt, has taxes to pay, and no cash flow left. “Financially there’s been a heavy burden through unsupportive regulation, excessive taxes and on top of that we got the negative supreme court decision,” Chief Executive Nick Read said.

Today, the company is formally called Vodafone-Idea, but retains its previous brand image and continues to directly deal with customers as Vodafone. The merger hasn’t been smooth and both the major promoters continue to pitch their own brand identity. However, they now share a common balance sheet and it speaks volumes about the company’s current standing.

Current status of Vodafone-Idea:

  • Vodafone-Idea has been bleeding money for the last few quarters and there’s no simple or short-term solution to stop this outflow. The entity has more than 320 million subscribers but has been actively losing them to competing rivals. It lost more than 14 million subscribers between March and June 2019. The company was India’s largest telco for a short period after the merger, but Jio took over the spot within a few quarters.
  • According to the latest financial reports, Vodafone-Idea reported a loss of 4,874 crores in Q1 of this financial year. This is against a shrinking revenue of just Rs 11,270 crores. Its average revenue per user is also disappointing at just Rs 108. This is among the lowest worldwide.
  • The company’s shares have been dipping every week and currently stand at just Rs 4.50 (November 4), down from a 52-week high of Rs 27.44. The market cap has been reduced to just Rs 11,000 crore, compared to its quarterly revenue. With the current trajectory, it’ll be a worthless company on the stock exchange very soon. Total debt now stands at more than Rs 1 lakh crore.
  • Vodafone (UK) has a 45.1 percent stake in the combined company. This is after transferring a 4.9 percent stake at Rs 110 per share to Aditya Birla Group for Rs 3,900 crore in cash. Aditya Birla Group now owns 26 percent of the combined company. The remaining 28.9 percent is owned by Idea shareholders.
  • For months there have been reports and speculations about Vodafone UK completely exiting the Indian market. From having invested billions of dollars into the Indian market, Vodafone now suddenly looks far less ambitious about its India plans.

Today, reports suggest Vodafone UK could finally quit the Indian market. Combined with the above facts, there are some serious questions being raised about the company’s survival. This has already fueled a lot of fake news and subscribers are worried about their connections.

If Vodafone UK exits, will the end-user be affected in the short-term?

  • There won’t be any direct repercussions for the end-user, at least for the next few months. Idea-promoter Aditya Birla Group is optimistic about the newly merged entity and continues to commit for a long-term future. Vodafone-Idea raised Rs 25,000 crore in May this year via a rights issue in which promoters Vodafone UK and Aditya Birla Group invested Rs 11,000 crore and Rs 7,250 crore, respectively.
  • Vodafone-Idea has repeatedly reiterated that its operations are ongoing normally and network integration is in process. It is said to have repaid a sizeable chunk of the almost Rs 4,300 crore of loans due to be cleared in this financial year using a portion of its Rs 25,000 crore rights issue proceed.
  • Brokerage Kotak Institutional Equities estimates “net finance costs will drop almost 13% sequentially in the June quarter, FY20, to Rs 2,429.4 crore, on account of a lower debt balance, post the rights issue.” Further, the merger is said to have reduced its operational costs by 11%.
  • It’s seeking a two-year moratorium on its annual spectrum payment citing debt and stress on the balance sheet.
  • The government also recognizes the telecom industry’s current situation and Telecommunications Minister Ravi Shankar Prasad said this month that the government is planning some reforms in the way spectrum is priced.
  • This week it was announced that a panel of senior bureaucrats will look into the demands made by telecom companies to defer airwaves (spectrum) payments due by March 2021 and 2022.
  • Vodafone Idea has enough cash reserves to service its debt obligations, according to internal sources. Data compiled by Bloomberg say the company has cash and equivalents worth Rs 7,550 crore as of March 31.

Yes, the situation at Vodafone-Idea is alarming and needs attention immediately. Jio’s war has crippled the telecom operator and there are only three major companies left in the country. Vodafone-Idea plays a crucial role in countering Jio and offering more options to the end-user. It holds over 30% of the market and both the promoters have already invested billions over the years.

With every passing week, there are no signs of relief from the government and the telco is expected to pay a huge sum of INR 50,000 crore in pending taxes. An interim moratorium on spectrum charges could be provided, however, it still won’t solve the company’s cash flow limitation. And without free cash, continued operations will be affected.

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