Vodafone Idea: Will not flounder, but will it flourish?

From ‘fight to survive’ mode around a year back, Vodafone Idea appears to be shifting to ‘survive to fight’ mode, thanks to the follow-on public offer (FPO) of ₹18,000 crore announced last week. There are positive takeaways, not the least being the fact that it will put to rest speculative activities of a few market operators. These players have been making merry by putting out chatter on interested stake buyers (Verizon, Amazon, Elon Musk, et al) from time to time, with nothing coming off it.

The FPO needs to be weighed against how much difference it is going to make to the company’s financial strength in the highly competitive Indian telecom market with its peers (Bharti Airtel and Reliance Jio) having far superior financial muscle. To make a come-back, Vodafone Idea would do well to take a leaf out of the turnaround of T-Mobile. For this, at some time in future after the FPO, it must look for ways for sizeable recapitalisation of the company.

Underperformers

Globally, telecom has been a challenging business with overwhelming regulatory issues across geographies. During the last 10 years, significant technological progress and evolutions have played out at a breathtaking rate in telecommunications — 3G, 4G, 5G, smartphone boom, fiber-to-home, etc. However, in this period the real winners have been companies in other sectors/that have capitalised on the telecom ecosystem. A look at the performance of the shares of leading telecom companies across major economies reveals that telecom stocks have largely been under-performers and, in some cases, significant wealth destroyers even (see table).

Ten out of the 15 leading telecom companies have significantly under-performed the benchmark index in their respective country of listing. Since telecom companies in many geographies are high dividend payers, we have considered the gross total returns (TRI), which include dividends and assumes the payouts were re-invested in the stock.

The few companies that have managed to outperform the index are T-Mobile Us, Deutsche Telekom, NTT, China Mobile and Bharti Airtel. But here too, it is worth nothing that Deutsche Telekom’s outperformance is largely driven by its stake in T-Mobile Us in which it has always held a significant controlling stake, while China Mobile’s performance on an absolute basis, is underwhelming.

T-Mobile Us, represents one of the best examples globally of a successful turnaround. A distant fourth player in the US, trailing the more formidable giants then — AT&T and Verizon — the company under an unconventional CEO, John Legere, adopted aggressive strategies to grow and win customers. Key to note is that a comfortable leverage position made it possible to compete hard and win. On the other hand, even companies considered global giants in telecom like AT&T and Vodafone are today just a shadow of their former glory.

High on debt

Telecom is a complicated business, which also requires periodical phases of heavy cash investments. Given this, the ₹18,000 crore that Vodafone Idea plans to raise from the FPO may not be sufficient to ensure a turnaround. At present, Vodafone Idea remains amongst the most indebted large telecom player globally by a wide margin with net debt/EBITDA of 14.3 times, which will come down to 12.7 times assuming the FPO goes well. This is still a very uncomfortable level and can constrain its ability to execute a successful long-term turnaround. For reference, globally telcos have net debt/EBITDA below 5 times, with most in the comfortable 2-3 times. And still it has been a challenge to create wealth for many of them.

Thus, while the FPO can be seen as a positive, recapitalisation in some form that brings down the net debt/EBITDA to at least under 5 times may be required to ensure the company can compete on even keel with peers. Further equity capital raise later is the more likely solution. There could be other ways such as the government converting more of the dues (now debt) into equity or the curative petition filed in the Supreme Court on AGR dues resulting in a favourable outcome. But these are long shots.

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