Despite tariff hikes, Vodafone Idea’s net worth and cash gravitate toward zero

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MUMBAI: A year is a long time in the life of India’s telcos. In March 2019, Vodafone Idea Ltd was the market leader by a wide margin in terms of number of subscribers. It had a net worth of about Rs60000 crore, and was about to augment its Rs7550 crore cash balance with a Rs25000 crore rights issue.

Of course, everyone knew that it was a company in decline, but hardly anyone could predict the rapid pace of decline.

In March, Vodafone Idea has fallen behind both Reliance Jio Infocomm Ltd and Bharti Airtel Ltd in terms of subscribers. More importantly, its net worth has practically evaporated and now stands at only Rs6000 crore. Cash and cash equivalents are less than Rs2500 crore.

Based on the cash burn and the net losses in Q4, even adjusted for exceptionals, it looks like the company’s net worth would have totally wiped out by end-June. Of course, the cash would have disappeared, too, necessitating refinancing to run operations.

All of this is despite the hefty tariff hikes in December, which helped the company report a 6% sequential increase in revenues in Q4. Average revenue per user (Arpu) rose 11%, far better than the mere 2% expansion at Reliance Jio Infocomm Ltd, and close to the 14% increase reported by Bharti Airtel Ltd.

Perhaps for the first time, Vodafone Idea matched Reliance Jio’s sequential revenue growth, although of course this is a pyrrhic victory.

Earnings before interest tax depreciation and amortization (Ebitda) grew 16% after adjusting for exceptional items, and reflected the benefits of tariff hikes. But the good news ends there.

The company’s cash constraints and the resultant delay in investments in its network are adversely impacting subscriber numbers. The company continues to lose subscribers, with the subscriber base at the end of the March quarter being 4% lower from December. 4G subs additions were just 10% of Bharti’s levels. And for the first time, it reported a drop in broadband subscribers of 1 million.

Its limitations on the network front are captured by the 7.9% growth in total data traffic last quarter. Comparatively, data traffic on Airtel’s network grew by about 16%. Capital expenditure during the quarter dropped 45%, partly impacted by covid-19 disruptions to equipment supply and nationwide lockdown.

In any case, Vodafone Idea’s ability to massively scale-up capex remains constrained. If the low cash balance wasn’t bad enough, the Supreme Court has been demanding a reasonable upfront payment before settling for a staggered payment mechanism for adjusted gross revenue (AGR) dues.

Already, the upfront payment of Rs6850 crore towards AGR dues, coupled with the cash burn in Q4, has led to a further increase in net debt. In end March, net debt stood at Rs1.125 trillion, up from Rs1.033 trillion in end December. Meanwhile, annualised Ebitda using Q4 numbers result in an unwieldy net debt to Ebitda ratio of 16 times.

Vodafone Idea’s future has hung in the balance for some time now. While much depends on the final verdict from the Supreme Court on the repayment schedule of AGR dues, it goes without saying that the company also needs a quick equity infusion to stay alive.

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