Interest cost may force Vodafone Idea to raise funds at regular intervals

Topics Vodafone Idea | Telecom

Vodafone Idea
The country’s largest telecom operator — Vodafone Idea — may need to raise funds at regular intervals to meet the rising interest payments, feel analysts. In addition, there will also be outgo related to capital expenditure or capex.

Maybank Kim Eng analyst Neerav Dalal noted that with the increasing interest payments, the company would need to raise funds through equity at regular intervals. “We forecast that net debt will increase to Rs 1.4 trillion for FY22 (estimates) from Rs 1.2 trillion in FY19,” Dalal noted.

Vodafone Idea still has its Indus Tower stake, currently valued at Rs 6,160 crore. This can be monetised as well as the fibre assets (currently valued at Rs 11,850 crore), which has been carved out into a separate subsidiary. Factoring in these two aspects, analysts feel that net debt to earning before interest, tax, depreciation and amortisation (Ebitda) could fall to 8.9-11X in FY 20-22 (estimates) from the current 10.6-13.4X. This still remains high against Bharti Airtel’s 2.3-3X. Analysts feel that the fibre assets (and also some of the debt) could be parked in an infrastructure investment fund (InvIT) in order to monetise it. 

Earlier in June, Vodafone Idea’s shareholders and creditors approved a proposal to transfer the fibre assets to its wholly-owned subsidiary Vodafone Towers Limited. In April, it had sought approval from the National Company Law Tribunal (NCLT), Ahmedabad, for transfer of its telecom fibre infrastructure to Vodafone Towers. A Vodafone Idea spokesperson noted, “As we are in the quiet period preceeding our Q1FY20 financial results announcement, we are unable to respond in detail.” Vodafone Idea said, “There is no plan for raising any further capital. Action has been initiated for transferring the fibre assets to a fully-owned subsidiary.”

Vodafone Idea’s FY19 Ebitda stood at Rs 4043 crore. This, however, is expected to rise in the coming fiscal year as the synergy benefits from the merger set in. 

“We raised Ebitda margins by 60-180 bps to factor in faster-than-expected synergy cost savings from the Vodafone India merger. We earlier thought full synergies of Rs 2,100 crore per quarter would only accrue in 4QFY21; We now bring this ahead to 1QFY21E, which raises our Ebitda by 8 per cent,” Dalal noted.

The company has already integrated distributors, retailers, service stores and service centres of the two entities – Idea and Vodafone India. It has also unified networks across 10 service areas. Analysts note the Vodafone Idea management is confident of completing network integration by March 2020. “As of the fourth quarter, annualised synergies of Rs 5,120 crore were ahead of our expectation. We now expect synergies of Rs 8,400 crore by 1QFY21E earlier than the expectation of 4QFY21,” Dalal said.

Vodafone-Idea’s FY19 capex was Rs 10,200 crore, which was less than half of the guidance of Rs 27,000 crore capex for FY19-20 combined. Maybank Kim Eng thus notes that shortfall in Ebitda could necessitate fund raising again. 

According to its estimates, there would be a shortfall of Rs 17,900 crore in FY20 when Vodafone-Idea’s Ebitda is expected to be around Rs 8700 crore. Maybank has factored in a capex of Rs 16,500 crore and net interest payments of Rs 10,100 crore. In FY21, the interest payments is estimated to rise to Rs 10,300 crore when the Ebitda is estimated to be around Rs 11,000 crore and capex at Rs 15,500 crore. By FY22, the net interest payments will rise to Rs 11,500 crore.  

A telecom sector analyst pointed out that recently Vodafone-Idea’s plea for moratorium from payment of spectrum dues was not accepted by the department of telecom. “Vodafone India alone had bought spectrum worth around Rs 80,000 crore in the auctions. The merged entity also has the payment liability of Idea Cellular’s spectrum worth Rs 64,000 crore,” he said.

Kumar Mangalam Birla had last year sought a two-year moratorium on annual spectrum payments given that the sector was under financial stress.  After the request was not accepted by the department of telecom, Vodafone Idea paid over Rs 6,000 crore worth of spectrum dues by borrowing money earlier this year.

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