Telecom sector set for more bloodbath as Voda Idea plans to pump in Rs 25,000 cr

The proposed plan of an equity infusion of about Rs 25,000 crore in Vodafone Idea will keep competitive intensity high in the sector, delaying the average revenue per user (Arpu) recovery, according to experts.

On Wednesday, in its first quarterly result for the merged entity Vodafone Idea, the company announced plans to raise capital of about Rs 25,000 crore, including infusion by Vodafone Group of Rs 11,000 crore and Aditya Birla Group of upto Rs 7,250 crore.

The Board of Directors has set up a committee to evaluate a potential capital raise through options including, but not limited to, a rights issue, qualified institutional placement and a preferential share issue. If approved, the plan of raising capital is expected to complete in Q4 of FY2019. Vodafone Idea loss after tax stood at Rs 4,974 crore in the July-September quarter, which included a one-time charge of Rs 566 crore, mainly due to integration and merger related costs.

An Edelweiss report said, "Such capital infusion will arm the company with a war chest to hold onto its market share, potentially delaying market recovery. In fact, such capital infusion may also stall undercutting by rivals (all well-funded) as the cost of increasing market share will move up significantly, given the current state of focus on user engagement by market participants, there is a low probability of such an outcome."

At the industry level, the three well-funded players' aspirations to be numero uno will keep the competitive intensity high, delaying sector Arpu recovery, Edelweiss said.

Many experts say challenges continue to remain for the merged entity as its balance sheet is leveraged and the other two private players – Reliance Jio and Bharti Airtel continue to spend huge capex on expanding 4G coverage.

The entry of Reliance Jio in the telecom space in September 2016 had triggered a consolidation spree in the industry where only three players have left along with a telecom PSU BSNL/MTNL. The mobile data tariffs have come down to a new low with voice becoming virtually free impacting the margins and financials of incumbents.

The numbers show Vodafone Idea added 4.4 million new broadband (4G) subscribers against 7.5 million for Bharti Airtel and 37 million for Reliance Jio during the second quarter ended September this year.

Vodafone Idea's subscriber base largely remains voice driven as data subscribers account for only 33% of total subscribers out of 422 million.

The company's ability to monetise voice successfully in an industry rapidly shifting to bundled plans remains to be seen and remains a concern as almost two-thirds of its subscriber base is still voice customers, a report by SBICAP Securities said.

The Arpu decline for Vodafone Idea at 4.7 % quarter on quarter (QoQ) was higher than that of Jio, a decline 2% QoQ, but in line with that of Bharti, decline by 5% QoQ.

In a note, JP Morgan said the proposed fund infusion of Rs 25,000 crore provides some relief, but it is likely to be very short-lived, unless RJio's pricing stance turns constructive.

Vodafone Idea does not appear to be a position currently to fund even basic capex, given the burdensome leverage which accelerates market share losses. This, coupled with Arpu pressures, continues to impact the operating performance, exacerbating the leverage problem, it said.

Though, the company had on Wednesday said it remained optimistic about the long-term outlook for the market and the future of the business, and further equity funding is required in order to ensure sufficient balance-sheet flexibility to successfully execute its strategy. The merger of Vodafone India and Idea Cellular was a result of consolidation triggered by hyper competition with the entry of Reliance Jio in the telecom sector.

EXPENSIVE CALL

• At the industry level, the three well-funded players aspirations to be numero uno will keep competitive intensity high, delaying sector Arpu recovery
   
• Voda Idea's balance sheet is leveraged and the other two private players – Reliance Jio and Bharti Airtel continue to expand 4G coverage