Vodafone Idea, once a rising star of AV Birla Group, is now in the dumps

The possible liquidation of Vodafone Idea will be one the fastest declines of an industry major and once one of India’s top companies in terms of revenues, assets and market capitalisation.

Just four years ago, Vodafone Idea (Idea Cellular earlier) was the most valuable member of the Aditya Birla group and the fastest growing mobile operator in the country with the industry's best financial ratios. At end of March 2015, Vodafone Idea had net debt to equity of 0.6x against Bharti Airtel’s 1.8x.

Vodafone Idea was the biggest beneficiary of the mobile number portability (MNP) and gained subscribers base and revenue market share from most of its rivals then. 

The company's success was most visible in smaller towns and villages and it had emerged the top operators in many non-metro circles such as Maharashtra (ex-Mumbai), Madhya Pradesh, Gujarat and Eastern Uttar Pradesh, among others. 

At its peak, the company’s ad campaign 'What an idea Sir ji', featuring Abhishek Bacchan, showed novel ways to use mobile telephony to solve India's complex social and economic problems. It was a big hit both among users and ad critics.

The stock market recognised its potential and the company’s market capitalisation nearly tripled between FY11 and FY15 against 15 per cent rise in Bharti Airtel market capitalisation during the period. At its peak, Vodafone Idea’s market capitalisation was only 40 per cent less that Bharti Airtel’s in line the revenue gap between the two companies.

Now, Vodafone Idea’s market capitalisation is just 5 per cent of Bharti Airtel’s despite having similar levels of financial liabilities, raising question mark over its survival as a going concern. (See the adjoining chart)

The biggest issue for the company is a steadily widening gap between its revenues and earnings and its financials liabilities. In the first half of the current financial year, the company reported operating loss of Rs 1,037 crore without the adjusted gross revenue dues, down sharply from Rs 1,773 crore operating profit a year ago and Rs 6,336 crore profit during the first half ending September 2018.

Its operating profits are now inadequate to service interest on its outstanding debt. The company has interest liability of Rs 7,378 crore during the first half of FY20, having doubled in the last one year. Till about FY15, the companies interest liability was around Rs 500 crore every six months against half-yearly operating profits of around Rs 6,000 crore. The six months ending March 2016 was the high point for the company when it reported an operating profit of around Rs 6,500 crore and had interest liability of Rs 1,340 crore. Analysts say that trouble for the company started with the February-March 2015 spectrum auction. The then Idea Cellular was the most aggressive bidder and spent Rs 30,100 crore in buying spectrum as it had to renew bread and butter 2G spectrum that was about to expire later that year. In comparison, Bharti Airtel spent Rs 29,130 crore in that auction while the amount spent by Reliance Jio was even lower at Rs 10,078 crore.

Not surprisingly, a senior company official likened the 2015 spectrum auction to a shakedown at gun point. “We had to choose between shutting our operations or paying through the nose to renew spectrum in circles where we had worked 20 years to create profitable operations.”

Besides, the then Vodafone India had spent Rs 25,810 crore during 2015 spectrum auction. In all, these two companies (Vodafone and Idea) together spent nearly Rs 1.03 trillion on acquiring or renewing their spectrum since 2010. This is as much as the total spent on spectrum acquisition by rest of the operators.

“All this liability is now sitting on Vodafone Idea’s balance sheet whose interest liability is squeezing the company’s finances dry,” said an analyst, on the condition of anonymity.

On the business side, discounting by Reliance Jio hit Vodafone Idea the hardest as it was the market leader in smaller towns and rural circles where mobile users were most susceptible to lower call rates.  “Idea’s success with pre-paid users in smaller towns and villages became its biggest liability as Jio began to entice them with free calls and rock-bottom 4G data rates,” said G Chokkalingam, founder and managing director of Equinomics Research and Advisory Services.

In comparison, market leader Bharti Airtel was dominant in Metros and big cities with large numbers of high paying post-paid customers, who were least likely to switch to a new operator.

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