Tag: agr dues

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Government Becomes Largest Stakeholder in Vodafone Idea: What Next?

The Government of India has become the largest shareholder in private telecom company Vodafone Idea. Vi has faced quite some turbulence in terms of its finances and is heavily burdened by debt to banks as well as the government. The government will be the largest shareholder in Vodafone Idea after converting all of its pending interest on Adjusted Gross Revenue (AGR) dues to equity. The government would now own a 35.8% stake worth Rs 16,000 crore in Vi. This piece covers all you need to know about the deal between the two entities. 

Click here to know more about the AGR dues saga that shook the telecom industry.

Government Holds The Largest Stake in Vodafone Idea (Vi)

Quite a few telecom companies came under pressure after a Supreme Court verdict ordered them to pay ‘pending’ AGR dues to the Telecom Regulatory Authority of India (TRAI). These dues ran into thousands of crores—something which they could not afford after a disrupted telecom sector. 

Moving on, the government had come up with financial relief packages for distressed telecom companies burdened by AGR dues. While these relief packages have managed to keep Vodafone Idea and Bharti Airtel afloat, they have done little to ensure faster recovery dues. Vodafone Idea owed the government ₹58,254 crore in AGR dues. It has paid back ₹7,854 crore or 13% of the total dues. The company faced stiff competition from its relatively better-off rivals Airtel and Jio. Both Vi and Airtel had the daunting task of clearing AGR dues along with expanding their business. 

The government eventually proposed converting all the pending interest on the spectrum and AGR dues into an equity stake in telcos. Vodafone Idea accepted the deal. 

It is a pretty common practice in the business world wherein a lender converts the pending debt into equity shareholding. The government now owns a 35.8% stake worth Rs 16,000 crore in Vodafone Idea. This deal has brought down the combined promoter holding of Vodafone Plc and Aditya Birla Group from ~72% to ~46%.  “The shares may be held through the statutory undertaking of the Unit Trust of India (SUUTI) on behalf of the Government of India or by any trustee-type or other suitable arrangement,” said Vodafone Idea in an exchange filing.

Vodafone Idea NOT a Public Sector Undertaking (PSU)

The stock hit the lower circuit after the announcement. The first question that comes to the mind of an average shareholder is: Will Vodafone Idea become a PSU? The answer is, no. 

The government holding a majority stake in Vi does not make the company a PSU. TRAI has confirmed that the government shall not pay to acquire any shares, nor does it intend to convert telcos into PSUs.

Vodafone Idea’s Managing Director Ravinder Takkar said in a statement that the government had no intention to manage the company’s business. He stated that the article of association was amended to allow voting rights to shareholders with taking over 13%, allowing promoters to make decisions even if their shareholding falls below 21%. Long story short, the promoters Vodafone Group and Aditya Birla Group will continue to manage the company.

Vodafone Idea’s shares rallied ~11% after the statement by MD Ravinder Takkar. 

Despite reassurances from government officials and company management, one must not forget that the government is the largest shareholder in Vodafone Idea. It could decide to move back on its word and take over or influence Vi’s management if the need arises. 

The Way Ahead

After the decision to convert pending dues into equity was announced, Vi’s shares nosedived ~20% in a single trading session. The company gained ~11% after MD Ravinder Takkar announced that the government had no intention to participate in management decisions.

After Vodafone Idea, Tata Teleservices said it is planning to convert its interest on AGR dues into government equity. Tata Teleservices has AGR dues of Rs 16,798 crore, of which it has paid Rs 4,197 crore. Following conversion, it is expected that the Government will hold nearly 9.5% of the company’s total outstanding shares. The company’s stock price (NSE: TTML) hit a lower circuit after the announcement.

There is also BSNL and a possible merger with the state-run telecom. Although the current stand is to not interfere in Vi’s operations, there is a possibility it could be changed.

Mukesh Ambani’s Jio had managed to capture a significant market share through its competitive pricing. According to a Competition Commission of India (CCI) report, there were 21 telecom companies in 2009. The figure died down to just 6 companies in 2021. Out of the six, two are financially distressed PSUs. One is defunct, and the remaining three are the only active private players in the country. The government is trying to keep afloat all three private players, i.e. Jio, Airtel, and Vodafone Idea. If one company shuts down, there would be a duopoly in the sector. A duopoly would give telecom companies greater bargaining power over their consumers, which would go against an average Indian citizen and thereby the government. 

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Editorial

Can IDFC First Bank Bounce Back from its Troubles?

IDFC or Infrastructure Development Finance Company and its subsidiary IDFC First Bank (formed in October 2015) have been under fire over the past few months. The IDFC Management has organized an informal conference call on September 14 to address concerns from investors. The management was bombarded with questions about their poor loan book, unsatisfactory financial performance, and dangerous exposure to the distressed teleco Vodafone Idea (Vi). As of August 31, 2021, its share price is much above than it was exactly a year back, yet still less than what it was in September 2016. In this piece, we explore what’s pricking IDFC First Bank and what lies ahead for its shareholders. 

Poor Loan Book And Additional Credit Costs

The company booked consistent profits in the financial year 2020-21. However, it recorded a loss of Rs 621 crores in its last quarter Q1FY22. The poor performance is owed to a jump in credit costs, poor quality of loans, and its high exposure to Vodafone-Idea. 

The company’s revenue for the quarter did go up by 11.08% over last year and 2.15% over the previous quarter. However, the credit costs and increasing provisions ate into its revenue. A loan book’s health is measured by two metrics, its Provisions and its Non-Performing Asset Ratio(%). The company’s Gross NPA went from 1.99% in June 2020 to 4.61% in June 2021. Its Net NPA (Gross NPA minus Provisions) has gone from 0.51% to 2.32% in the same period. 

To ensure that a bank doesn’t get into big trouble, it sets aside some money in proportion to its bad loans/NPA ratio. The process of setting aside such funds is called setting aside a Provision. IDFC First’s Provision went up by 54% from Rs 646 crore in Q4FY21 to Rs 1,001 crore in Q1FY22. The more the borrowers default on loans, the higher provisions the bank has to set aside. This time, the second wave of COVID-19 and poor asset quality led to IDFC First setting aside higher provisions. Additionally, the bank has been unable to control its operating expenses. Its Operating Expense went up by ~54% over a year, while its Total Revenue increased only by ~11% in the same period. 

Unsafe Exposure To Vodafone Idea

In the past few months, IDFC First shares were hammered down till August-end. Nevertheless, the stock regained its position throughout September. The stock has been under pressure since its loan book has high exposure to telecom operator Vodafone Idea. Vi is a financially distressed company. It has Rs 62,000 crore pending in Adjusted Gross Revenue (AGR) dues to the government. The company’s total debt is worth Rs 1.8 lakh crore. Out of the total debt, Vodafone Idea owes IDFC First Bank around Rs 3,240 crore. 

Essentially, IDFC First has 3% of its total loan book exposed to Vodafone Idea. The single-digit number isn’t insignificant. Even SBI, the largest lender to Vodafone Idea, has only 0.5% of its total loan book exposed to Vi. If the telecom company were to shut down completely, IDFC First Bank could face a huge blow. However, Vi’s shutdown is not certain as the government has provided a four-year moratorium to all telecom companies with pending AGR dues. IDFC First Bank had set a provision of Rs 324 crore, which is 15% of total exposure to Vodafone Idea.

Ideally, IDFC First’s share price revolves around news regarding Vodafone Idea. The day the government announced the moratorium for Vodafone-Idea’s AGR dues, IDFC First Bank’s shares rallied by ~4.5%. Apart from other indicators, an ideal investor should watch out for the status of Vi to map the share price of IDFC First Bank. 

Shareholder’s Concern

IDFC First Bank’s parent company IDFC Ltd is performing worse than its subsidiary. On September 14, 2021, IDFC Ltd. held an informal conference call to address investor’s concerns about the company’s performance in recent months. They were bombarded with questions from its shareholders. The entire conference call hinted towards dissatisfaction amongst the shareholders. They questioned the top-level management on CEO salary, management decisions, and the complexity in the structure of the company. They even addressed the loss in value for its shareholders and questioned the company about how it plans to address it. 

In the conference call, shareholders suggested two things: the sale of the Asset Management Business and a ‘reverse merger’ with its better-performing subsidiary IDFC First Bank. IDFC Ltd indeed plans to reverse merge with its subsidiary IDFC First Bank in which it holds close to 36.5% stake, mostly after the sale of its asset management business. You can check out the whole conference call here.

The Way Ahead

Despite some headwinds, why could IDFC First Bank be a good buy for investors? The reason is simple. Supportive technical indicators and a strong plan by the management. The company is ~30% below its 52 week high of Rs 51.4 per share. The moratorium provided by the government to telecom companies on AGR dues provided relief to IDFC First Bank shareholders. The share price rallied ~4.5% after the decision.

IDFC First’s management has some plans to turn the game around. The company plans to reduce its wholesale business (lending money to other big institutions) and increase its retail business (housing loans, personal loans, etc). The bank further plans to have at least 70% retail loans in its loan book in the next few years. This allows the company to diversify and reduce the burden of increasing corporate debt. India’s booming housing market in the coming years may support IDFC First’s plans of pressing on its retail business.  

IDFC First Bank is expecting to gain traction, reduce its credit costs, provisions for bad loans, and NPAs. This will eventually translate into very good profit numbers in the coming quarters and a rally in stock prices for the coming months. 

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Editorial

Is Vodafone Idea Staring at Slow Death?

Vodafone Idea Ltd (Vi) has been all over the news lately. Unfortunately, none of the reports about the company are positive. They are losing lakhs of subscribers rapidly and are destined to file for bankruptcy soon. There is a high level of uncertainty surrounding the survival of the telecom operator. Many feel that Vi is staring at slow death. The company’s shares have plummeted nearly 30% over the past month.

In this article, we take a closer look into the current state of Vodafone Idea and its recent financial performance.

Vi’s Massive Debt

With the exception of Reliance Jio, the major players in the Indian telecom industry are struggling with high debt. Companies have to pay hefty charges for operating and using the public airwaves in our country. They obtain rights to transmit signals over specific bands through telecom spectrum auctions. As of 2019, telecom operators collectively owed nearly Rs 1.47 lakh crore to the Centre. They were offered an extension of two years to pay off all financial obligations with interest. Vodafone Idea’s deferred spectrum charges stand at Rs 1.06 lakh crore! Reports suggest that Vi will have to pay an installment of ~Rs 16,000 crore at the end of March 2022.

Then comes Adjusted Gross Revenue (AGR) dues. Under this revenue-sharing model (introduced in 1999), telecos are required to share a percentage of their total income with the government as annual license fees and spectrum usage charges. AGR covers the revenue earned by telecom firms, including from non-telecom sources such as deposit interests and the sale of assets. [Read more on AGR dues here].

Vodafone Idea’s total liability towards AGR dues stands at Rs 62,180 crore (as of June 30, 2021)! An installment of ~Rs 8,400 is due in March 2022. Moreover, Vi’s debt from banks and financial institutions stands at Rs 23,400 crore. All these have caused a severe dent in the company’s balance sheet.

Heavy Competition

As we know, Vodafone Idea faces stiff competition from Reliance Jio Infocomm and Bharti Airtel. Jio dominates India’s mobile market and has maintained over 35% gross subscriber market share since July 2020. They plan on launching 5G services very soon. On the other hand, Bharti Airtel had outperformed Jio in terms of active subscriber rates over the past few quarters. In February 2021, they also became the first telecom company to demonstrate 5G over a live commercial network in India (in Hyderabad). 

Meanwhile, Vodafone Idea has been losing lakhs of subscribers. The company has been in deep trouble ever since Jio introduced aggressive tariff rates in India. From November 2019 to February 2021, Vi reportedly lost over 5 crore subscribers. Their rivals had collectively added over 6.6 crore subscribers during the same period. The cash-strapped company is finding it extremely difficult to compete with low tariff rates and invest in 4G/5G infrastructure. 

Vi’s management has to constantly focus on retaining customers and paying their AGR dues.

Disappointing Q1 Results

Vi posted its quarterly results for the April-June quarter (Q1 FY22) on August 14, 2021. The results were below the street/analysts’ estimates. Let us look at the main highlights: 

  • Vodafone Idea reported a net loss of Rs 7319.1 crore for the quarter ended June (Q1 FY22). It had posted a net loss of Rs 7,022.8 crore in the previous quarter (Q4 FY21). Net loss in Q1 FY21 stood at Rs 25,460, mainly due to provisioning for AGR dues liability.
  • The telecom operator’s revenue fell 4.7% QoQ (or 14% YoY) to Rs 9,152.3 crore in Q1. This is the company’s lowest quarterly revenue in more than two years. Fewer recharges due to localised lockdowns, free validity extensions for low-cost customers, and a general slowdown in economic activity affected revenue in Q1.
  • Vi’s wireless subscriber base stood at 25.54 crore as of June 30, 2021. Unfortunately, they had lost 1.23 crore subscribers since March. The 4G subscriber base stood at 1.23 crore, a decline of 10 lakh subscribers during the quarter.
  • The Average Revenue Per User (ARPU) declined to Rs 104 in Q1 FY22, compared to Rs 107 in Q4 FY21. For comparison, Bharti Airtel had an ARPU of Rs 146, whereas Jio had an ARPU of Rs 138 in Q1.
  • Vi’s net debt stood at Rs 1,90,670 crore in Q1, an increase of 5.95% QoQ (or 65.1% YoY). 

What Next for Vi?

Sadly, the Vodafone Group has made it clear it will not infuse any additional capital into the loss-making venture with Aditya Birla Group. In a desperate attempt to save Vi, Kumar Mangalam Birla wrote a letter to the Indian government last month. He offered to hand over his stake in the company to any public sector entity. He pleaded with the Centre to consider the “looming crisis” that the telecom operator is going through and bail them out. On August 4, Vodafone Idea announced the Birla has stepped down as Non-Executive Director and Non-Executive Chairman of the Board. Many argue that the Indian telecom industry is struggling now as a result of the brutal or repressive policies introduced by past governments.

Over the past few months, Vi has been trying to convince the Telecom Regulatory Authority of India (TRAI) to impose a floor price or a minimum tariff rate. The company has stated that such a measure will help existing telecom operators to earn more. Vodafone Idea has also pleaded to the Centre to extend the moratorium on spectrum dues. They are eagerly awaiting a judgment on these appeals. 

According to analysts, Vi is staring at a ‘slow death’ if it fails to quickly raise ~Rs 26,000-37,000 crore that it urgently requires to clear AGR dues, payment obligations, and invest in 4G networks. Reports are flying around stating that the Centre will soon announce a telecom relief package, and work is underway to provide aid to stressed telecom companies.

Will Vodafone Idea survive? Or will it completely collapse and die? We will have to patiently wait and watch. Let us know your views on the topic in the comments section of the marketfeed app.