Vodafone Idea on the edge after SC's AGR verdict; Jio may gain most

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It does not require a big reach of the imagination to make out who will be the biggest beneficiary of the Supreme Court refusing to review on Thursday its earlier judgment on adjusted gross revenue (AGR). 

First comes Reliance Jio and at number two is Bharti Airtel. And the one to find itself on the edge will be Vodafone Idea, for which the question will be whether to close down operations or still ply the trade.

The reasons are simple: The AGR hit for Jio is negligible because it has to fork out a mere Rs 60 crore. And it will be easier for it to hit its target of getting 500 million customers (currently it has 360 million). 

Jio is adding 8-9 million customers every month, so hitting the magic number could take 16-18 months. But if Vodafone Idea quits, there will be 311 million additional customers, part of whom Jio will cream off as more and more of them move from 2G/3G to 4G. 

Jio also has an attractive offer for them through its 4G feature phone, which, priced at Rs 699, makes the upgrade from 2G to 4G inexpensive.

Bharti Airtel might have to use most of the $3 billion it has raised from a qualified institutional placement and foreign currency convertible bonds to pay its dues of Rs 48,000 crore. 

However, there is hope that the government might, through an executive order, go for a staggered plan of payment, which would reduce the pressure. But the positive thing for the firm is that its net debt to Ebitda (earnings before interest, tax, depreciation, and amortisation) is in control at 3.3 and it has factored in the losses on account of the AGR payout in its financial results in the September quarter of FY20. 

Whatever happens to Vodafone Idea could be a key gain for Bharti Airtel, something which even Jio cannot leverage. For instance, 7.3 per cent of Vodafone-Idea’s customers are postpaid and they account for more than 20 per cent of its revenues, say analysts, because they have a high average revenue per user (ARPU). In contrast, 5.6 per cent of Airtel’s customers postpaid; it has put together a strategy to become the largest player in this segment. And if Vodafone Idea shuts down or becomes weak, the bulk of these high-paying ARPU customers will move to Airtel.

Jio does not have a comprehensive postpaid offer like it, and has preferred to play aggressively in the prepaid market. It has only one offer in this space (at Rs 199), which accounts for only 1 per cent of its subscriber base.

Second, the bulk of the Vodafone Idea customers use 2G phones and few of them use data. Based on the latest figures, the company has around 200 million 2G customers, of whom only 38 million use data. 

Analysts believe that many of them will continue to be on the 2G network and Airtel provides the opportunity for seamlessly shifting them to its 2G network without changing the handset or even SIM card (they can port out). 

On the other hand, Jio has a 4G network only. Besides, its challenge is accentuated by the fact that tariffs have gone up by 15 per cent to 40 per cent, forcing 2G customers to think twice before they make the switch.

Bharti Airtel has successfully been able to maintain its revenue share in the market at 30 per cent despite the Jio onslaught. And Chairman Sunil Mittal, in a meet with Goldman Sachs, said it should be able to garner about 50 per cent of the incremental market share. 

Yet the biggest challenge will be for Vodafone Idea, which has to stump up more than Rs 53,000 crore and is steeped in debt. Both the partners — Vodafone and Kumarmanglam Birla — have made it public that it would close down operations if the government does not come to its rescue. 

The good news is that the government has done so partly by giving the telcos a two-year moratorium on paying for deferred spectrum, which releases about Rs 25,000 crore for the company at least in this period. Its strategy would be based on what the government offers now in terms of staggered payment. 

The Cellular Operators Association of India has asked for a 10-year term with a two-year moratorium, which would reduce its pain a bit. It would mean an initial outgo of around Rs 5,000 crore for Vodafone Idea if the government asks for a 10 per cent upfront payment and the double of that at 20 per cent. 

The company is losing market share, especially in the B and C circles, and has a highly leveraged balance sheet. Its spectrum debt is two-four times that of Bharti Airtel or Jio. It will require more investment in moving its network faster from 2G/3G to 4G if it wants to retain customers. 

Clearly the two shareholders have to bring in more equity (as the scope for debt is hardly there) or another partner. That is the call that will determine Vodafone Idea’s future.

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