India has devised a mechanism for private telecom operators to convert the dues arising from interest accrued during the moratorium period into equity owned by the Indian government, which has also retained the option to convert a part of principal dues into equity at the end of four years of moratorium.
The guidelines regarding the same have to be finalised by the Department of Telecommunications and India’s Finance Ministry.
Experts who analysed the telecom relief package announced on Wednesday said that the four-year moratorium would ease immediate cash flow constraints for cash-strapped Vodafone Idea (VIL).
They, however, said that in the worst-case scenario, if the telecom operator opts to convert its interest accrued during the moratorium period, it would significantly dilute the existing shareholders’ stake, and the government may end up becoming the largest shareholder of the telco.
The option to convert interest on deferred payment into equity works to Rs94 billion ($1.29 billion) for Vodafone Idea. At the end of four years, the government also can convert the deferred instalment into equity which works to Rs1,008 billion ($13.81billion) for the telecom operator.
“Total equity conversion will be Rs 1,102 billion ($15.1 billion) in next four years on a market cap of Rs 260 billion ($3.56 billion). The equity conversion will ensure at the end of four years, VIL will not have elevated debt liability; but, the massive dilution, if it happens, will significantly dilute the existing shareholders’ stake, and the government may end-up becoming the largest shareholder of the telco. Thus, increasing going concern visibility for VIL,” ICICI Securities said in an analyst note on Thursday.
In a separate note, Credit Suisse said that Vodafone Idea would need to also raise $1 billion over the next 6-9 months to repay its non-spectrum debt and ride through these four years with minimal CAPEX. Further, if VIL were to opt to convert interest accrued during the moratorium period, it would entail a dilution of over 70% for existing VIL shareholders with the government owning ~70% of VIL,” it added.
Credit Suisse analysts also said that despite the four-year moratorium and equity conversion of interest during the moratorium, Vodafone Idea would need an ARPU of Rs 240 ($3.40)by FY26 to meet Rs330bn of annual spectrum payments and AGR dues which will need to be repaid over the remaining tenure. “This represents a 23% CAGR in ARPU for VIL over next four years and is assuming VIL is able to retain 260 million subs.”
On Wednesday, India’s telecom, IT and Railway minister Ashwini Vaishnaw said that a four-year moratorium on AGR and spectrum payments had been given to telcos. “They can pay their dues to the government at the end of the four years, but whosoever avails this opportunity will have to pay an interest at MCLR plus 2%.” He later clarified that the government would have the option of converting part of the dues of the telcos after four years into equity.
Notably, Aditya Birla Group chairman Kumar Mangalam Birla, who recently stepped down as the chairman of Vodafone Idea, had informed the Indian government in June that Vodafone Idea had offered to give up ABG’s stake of 27.66% in the company to a state-owned entity that could help revive the company.
Analysts said that the Indian government’s decision would provide cash flow relief for Bharti Airtel and Reliance Jio to invest in 5G networks if they were to opt for a moratorium, which would put additional pressure on Vodafone Idea.
They said that without any cash infusion and tariff hikes, Vodafone Idea might skip participating in the upcoming 5G spectrum auction.
“With no visibility on tariff hikes, we believe that VIL’s cash EBITDA should be able to meet its capex requirements for the next four years. However we don’t see VIL in a position to materially improve its liquidity so as to generate cash flows to pay the AGR and spectrum payments post the moratorium. Without any cash injection we also don’t see VIL participating in the 5G auction. This would further consolidate the market in favor of Bharti and Jio” BoFA Securities said in note.