Vodafone-Idea’s rebranding exercise does nothing for investors; here’s what the telco needs to survive

At the end of May this year, Vodafone Idea’s active subscriber base stood at 277 million, while Bharti Airtel and Reliance Jio were at 307 million and 313 million.

With Vodafone-Idea’s rebranding exercise, the struggling telecom operator looks poised to battle it out in India’s fiercely competitive telecom space. The launch of the unified brand name Vi (Read We) marks the completion of the integration of the two companies, however it still does not answer the pressing question — will it manage to regain market share? Although the rebranding assures on-lookers but survival in a market where the company has lost close to 45 million subscribers in a year is key to draw investors. Experts say heavy capital expenditure is what the telco needs or a large equity infusion to fight the better placed Bharti Airtel and Reliance Jio. 

Need of the hour

“The rebranding exercise is unlikely to prevent subscriber loss for Vodafone-Idea or restore their subscribers. The company needs heavy capital expenditure to save the market share that it is losing,” Nitin Soni, Senior Director, Fitch Ratings told Financial Express Online. The capital expenditure of Vodafone Idea in the previous two fiscals has been declining and analysts estimate this year’s capex to be around Rs 9,400 crore. On the other hand Bharti Airtel’s capex is expected to be over Rs 25,000 crore.

Vodafone Idea’s ARPU has been significantly low when compared to peers. “The key ingredient for Vodafone to be able to service its debt and pay back the government its AGR dues & Spectrum charges is ARPUs. Vodafone Idea needs to double its ARPU from Rs.121 in Q1FY20 to Rs.245 by FY23E just to achieve cash flow breakeven,” said Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities. Yesterday, at the launch of the new brand, Vodafone Idea CEO Ravinder Takkar said the company has raised tariffs twice since the merger and is ready to take the first step again. At the end of the April June quarter, Vodafone Idea’s ARPU was only Rs 114.

How good is the Rs 25,000-cr fundraising?

According to industry experts, the telecom company that was born after the merger between Idea and Vodafone India has a short term debt of nearly Rs 26,000 crore and a gross debt of more than Rs 1.15 lakh crore. “The fundraising will help Vodafone Idea survive but it won’t help improve the position that it is in right now. Capex has been low and declining for the past few quarters,” said Nitin Soni as he stressed on the need for capital expenditure by Vodafone Idea.

According to him, the company needs to invest in the 4G networks to save their subscriber base that it is rapidly losing. A recent note by Fitch ratings highlighted that at the end of April-June quarter, Vodafone Idea had a cash balance of $470 million, which was well short of short-term debt maturities and guarantees of $3.6 billion.

At the end of May this year, Vodafone Idea’s active subscriber base stood at 277 million, while Bharti Airtel and Reliance Jio were at 307 million and 313 million. Rusmik Oza too believes that the capital raising efforts will help solve near term problems of the company. However, in the long-run he believes the telco needs to improve pricing and expand the network to stem the loss in market share. 

Despite the outlook remaining grim for the company, the stock has rallied 33% since the beginning of this month. Additionally, the capital raising plans, analysts say will only boost the share price. “AGR verdict overhang is removed from the stock and clarity has come with respect to the timeline the Company has to clear AGR dues,” said Keshav Lahoti, Associate Equity Analyst, Angel Broking. “Raising the desired quantum of funds from the market can lead to further rally in the stock,” he added.

A duopoly in the making?

With the looks of it, the company is not looking to go out without a fight. The biggest loser if the company was to shut shop would be the government, according to Rusmik Oza. “If we add the pending AGR dues to the deferred spectrum liabilities then Vodafone Idea owes nearly Rs 1.5 lakh cr to the government. It is in the interest of everyone to have a three player market so that customers have the choice to select the service provider,” he adds.

On the other hand, Nitin Soni sees the telecom space evolve with two big players — Bharti Airtel and Reliance Jio, and a smaller player — Vodafone Idea. “The situation looks to remain the same unless Vodafone Idea manages to attract large equity infusion,” he adds while predicting further subscriber consolidation.