Vodafone Idea

Capitalizing on the hopes of imminent tariff hike

Plans to purchase equipment and expand network infrastructure

Vodafone Idea is atelecommunications services provider in India. The company provides voice, data, enterprise, and other value-added services (Vas), including short messaging services and digital services across 2G, 3G and 4G technologies. The company offers connectivity services to enterprise customers. It holds active licenses for national long distance (NLD), international long distance (ILD) and internet service provider (ISP), and registration for infrastructure provider (IP-1) services.

The company offers its services and products under the‘VI’ brand, backed by a strong brand recall of the Vodafone and Idea brands and cumulatively more than three decades of operations.

The company is the third largest telecommunications services provider in India based on subscriber base and the sixth largest cellular operator globally in terms of number of subscribers in a single country of operations.

The company’s applicable gross revenue (ApGR) market share was 17.79% of the Indian mobile telecommunications services industry in Q3 FY2024. It had over 223.0 million subscribers and a subscriber market share of 19.3%. Further, approximately 401 billion voice minutes and approximately 6,004 billion MB of data were carried on its network.

The company had an aggregate of 8,005.2 MHz of spectrum holdings across different frequency bands end December 2023. Of this, 7,975.2 MHz spectrum is liberalized and can be used towards deployment of any technology (2G, 3G, 4G or 5G). This includes the mid-band 5G spectrum (3300 MHz band) in 17 priority service areas and mmWave 5G spectrum (26 GHz band) in 16 service areas. The company had approximately 183,400 unique tower locations and over 438,900 broadband (3G and 4G) sites, with all its 4G sites enabled for the provision of voice over LTE (VoLTE) services.

The company’s population coverage exceeded 1.2 billion individuals, and its optical fibre cable spanned over 298,000 kilometres end December 2024, combining both its own infrastructure and indefeasible rights of use (IRU) taken (excluding overlaps). The mobile network reaches than 487,000 towns and villages in India, with broadband services in more than 342,200 towns and villages. Through its robust infrastructure, it carries out most of its domestic and international outbound traffic on its own network for optimal efficiency. Additionally, revenue is generated by partnering with other telecommunication companies to carry incoming international traffic to India.

Vodafone Idea is an Aditya Birla Group and Vodafone Group partnership. Together they held 48.75% stake in Vodafone Idea as on April 11,2024. The Aditya Birla group is one of the largest business groups in India and a leading global conglomerate with presence in 40 countries across diverse sectors such as cement, metals and mining, mobile telecommunications, fashion retail, financial services, textiles, carbon black, trading, chemicals, renewables, paints, real estate, and jewelry retail. The Vodafone group is the largest pan-European and African telecommunication’s company. It provides mobile and fixed services to over 300 million customers in 17 countries and had collaborations with mobile networks in 45 other countries as on 31 December 2023.

Object of the offer

The IPO consists of a fresh issue amounting to Rs 18,000 crore. There is no offer for sale.

Out of the proceeds from the fresh issue, Rs 12,750 crore will be utilized for purchase of equipment for the expansion of the network infrastructure by setting up new 4G sites, expanding the capacity of existing 4G sites and new 4G sites, and setting up new 5G sites; Rs 2175.3 crore will be utilized for payment of certain deferred payments for spectrum to the Department of Telecommunication and the GST; and the balance for general corporate purpose.

Strengths

The company is the third largest telecommunications services provider in India based on subscriber base. It had over 223.0 million subscribers, with subscriber market share of 19.3% end December 2023. Its ApGR market share was 17.79% of the Indian mobile telecommunications services industry in Q3 FY 2024. The company had a leading applicable gross revenue market share in the Kerala and Mumbai service areas and the second largest market share in the Gujarat and Kolkata service areas in Q3 FY 2024. Themarket share was over 20% in the Maharashtra, Delhi, Uttar Pradesh (West) and Haryana service areas in Q4 FY 2024.

The company has a large spectrum portfolio with 8,005.2 MHz of spectrum holdings across different frequency bands of which 7,975.2 MHz spectrum is liberalized and can be used towards deployment of any technology (2G, 3G, 4G or 5G). This includes the mid band 5G spectrum (3300 MHz band) in 17 priority service areas and mmWave 5G spectrum (26 GHz band) in 16 service areas. The large spectrum portfolio enables a superior experience to its customers as it has the highest 4G spectrum available per million subscribers and sufficient capability to support migration of its entire 4G subscriber base to 5G. The emergence of 5G technology will support strengthening of the enterprise offerings and provide new opportunities for business growth.

The company’s existing network is built on 5G-ready architecture. Its 4G network has been strategically deployed with a future-proof architecture. All the new basebands and over 90% of the time division duplex (TDD) 2500 MHz band radio units are 5G-ready, with 10G bandwidth capabilities. Various advanced 5G technologies have been deployed. These include massive multiple-input multiple-output (Massive MIMO) for improved capacity and open radio access network (ORAN) for increased flexibility. There were 74,800 TDD radios, 13,900 Massive MIMO sites, and 13,000 small cells as of 31 December 2023. Moreover, the company completed the minimum rollout obligations in four service areas of Maharashtra, Delhi, Tamil Nadu, and Punjab, by collaborating with original equipment manufacturers (OEMs). The network includes new unified roadmap architectures of virtualized radio access network (vRAN) and ORAN solutions. The E-band technology is being promoted as a viable alternative. The pan-India core network is also fully equipped to support 5G non-standalone (NSA) technology.

The company has a large enterprise customer base, with long standing relationship and a diversified portfolio of business services. The customers include global enterprises, corporates, SMEs, government organizations, small-offices, and home-offices, and start-ups. A dedicated team of account and service managers addresses the enterprise mobility, fixed line, IoT, cloud and converged communications requirements of the enterprise customers. According to Frost & Sullivan’s ‘Enterprise Mobile Services Quarterly Tracker’ Report, September 2023 (F&S September 2023 Report), the enterprise mobility market share of the company was 29.9% in the six months ended 30 September 2023. The IoT services revenue market share was 30.3%.

The company has an extensive distribution and service network comprising over 10,000 distributors servicing approximately 787,000 retailers across India as of 31 December 2023. Further, there were 2,300 branded urban stores in India, including own stores and franchisee-owned stores covering over 95% of the districts in India.

‘VI’ is one of the trusted brands with a strong proposition. The `VI’ brand has completed over three years, achieving recognition and recall in the Indian telecommunications market.

The company has been backed by strong promoter groups:the Aditya Birla group and the Vodafone group.

Weaknesses

Providing telecommunications or related services that are technologically up-to-date and keeping up with changing consumer preferences are essential for the company to remain competitive.

Requires significant capital to fund capital expenditure and working capital requirements.

Has incurred significant indebtedness and has not complied with certain covenants under its financing agreements. Inability to meet obligations, including financial and other covenants, under thedebt financing arrangements could adversely affect the financial condition. The total gross debt (excluding lease liabilities and including interest accrued but not due) stood at Rs 2,03,425.7 crore, comprising deferred spectrum payment obligations of Rs 195276.2 crore as on December 31, 2023.

The company had planned raising of funds from the promoters/FIIs and long-term debt from lenders for capex related to the 4G expansion and roll-out of 5G services, in a bid to arrest the declining subscriber base and augment it further. However, there has been delay in fructification of the same beyond the envisaged timelines which has led to cash flow mismatches.

Vodafone Idea was market leader in 2018 with market share of 36.55% and was the leading player in the sector, however the same has declined to 19.3% as on December 31,2023. Further, due to deteriorating financial condition and inability to raise funds, the company has failed to gain market share through expansion of 4G services and timely rollout of 5G services.

Telecommunication licenses and spectrum allocations are subject to terms and conditions, ongoing review, and varying interpretations, each of which may result in modification, suspension, early termination, expiry on completion of the term or additional payments.

Non-payment of large dues to its vendors, especially tower vendors and equipment suppliers, could have an adverse effect on the business and operations. As of 31 December 2023, the trade payable aggregated to Rs 13807.8 crore, with capital expenditure aggregating Rs 6926.2 crore and lease liabilities aggregating Rs 36712.1 crore.

Competition in the Indian telecommunications industry is intense. Primary competitors are other telecommunication companies such as Bharti Airtel, Reliance Jio Infocomm, Bharat Sanchar Nigam, and Mahanagar Telephone Nigam. Competition from providers of new telecommunication services is due to technological developments and the convergence of various telecommunication services. Due to intense competition the company has been not able to raise tariffs as it has become a price taker due to market share loss and Jio’s dominance and dictating the market trends and tariffs.

There are outstanding legal proceedings against the promoters and the company amounting to Rs 61508.5 crore and Rs 127614 crore, respectively. Any adverse outcome may affect the financial condition.

Revenue may be adversely affected if business from the service areas of Maharashtra, Gujarat, and Mumbai or from the other priority service areas declines.

Losses were incurred during recent periods. Therefore, achieving or sustaining profitability in future is doubtful. Loss after tax was Rs 23563.8 crore in the nine months ended31 December 2023, Rs 23187.0 crore in the nine months ended December 2022, Rs 29301.1crore in FY 2023,Rs 28245.4crore in FY 2022, and Rs 44233.1crore in FY 2021. The networth was negative and stood at Rs -97931.9 crore.

The audit and review reports of the statutory auditors contain a paragraph on material uncertainty relating to going concern. There can be no assurance that any similar observations or remarks will not form part of the financial statements, or that such remarks will not affect the financial condition.

Any further downgrade in the credit ratings could increase the borrowing costs, affect the ability to obtain financing, and adversely affect the financial condition.

Contingent liabilities were Rs 19021.7 crore as on 31 December 2023.

Valuation

Sales were up by 1.1% to Rs 32044.90 crore in the nine months ended December 2023 over a year ago. The OPM increased 7 bps to 39.91%, leading to a 1.5% increase in OP to Rs 12790.2 crore. OI decreased 62.9% to Rs 80.7 crore. Interest cost increased 4.8% to Rs 19485.2 crore.However,depreciation and amortization cost declined 2.7% to Rs 16882.2 crore. Loss before tax increased 1.7% to Rs 22743.9 crore. Tax expenses decreased 1.2% to Rs 819.9 crore. Net loss widened 1.6% to 23563.8 crore as against net loss of 23187.0 crore in the corresponding period of the previous year.

Sales were up by 9.5% to Rs 42177.2 crore in FY 2023. The OPM declined 177 bps to 39.87%, leading to a 4.9% increase in OP to Rs 16817.0 crore. OI increased 140.6% to Rs 311.3 crore. Also,interest cost rose11.3% to Rs 23354.3 crore. Depreciation declined 2.3% to Rs 23049.7 crore. Loss before tax inclined 3.8% to Rs 29297.6. Tax expenses were lower by 69% to Rs 3.5 crore. Net loss stood at Rs 29301 crore as against net loss of Rs 28245.4 crore in FY2022.

On 24 March 2024, the company issued 1,44,00,00,000 equity shares to ATC Telecom at a face value of Rs 10 to raise a total sum of Rs 1440 crore. Further, on 06 April 2024, the board approved the issuance of up to 1,39,54,27,034 equity shares at an issue price of Rs 14.87 per equity share, aggregating to Rs 2075.0 crore, to one of the entities forming part of the company’s promoter group, Oriana Investments Pte Ltd, on a preferential basis. The shareholders’ approval is pending.

As the company is making losses, the P/E ratio cannot be calculated. There are strong hopes that the telecom tariffs will be hiked after Lok Sabha elections as such the company might return to profitability in the future.

At the higher price band of Rs 11, the offer is made at around 19.15 times post-IPO EV/TTM EBITDA and 7.64 times EV /TTM sales. In comparison listed peer Bharti Airtel trades at 11.6 times its EV/TTM EBITDA and EV/ TTM Sales of 6.06 times. Bharti Airtel is making profits in the last 2 years.