After its big bet on Adani companies paid back spectacularly, America's GQG Partners, an investment boutique which manages global and emerging market equities for institutions, advisors, and individuals worldwide, is betting on another beleaguered company. Headed by Indian-origin veteran fund manager Rajiv Jain, GQG Partners is looking to invest nearly $400 million in Vodafone Idea's share sale that started today and closes on April 22, ET has reported. This is being seen as a big endorsement for a loss-making, debt-ridden Vodafone Idea (Vi), a joint venture between Vodafone Group Plc and the Aditya Birla Group.
However, Adani's crisis was different from Vi's. While Adani faced an existential threat that emerged from mere allegations by American short-seller Hindenburg Research, Vi faces grave structural issues that can't just blow away. That's why the Florida-based investment firm's bet on Vi looks outlandish.
Yet, many see a ray of hope for the struggling company. The Rs 18,000 crore follow-on public offer (FPO) which starts today, India's largest, is part of the overall plan to raise Rs 45,000 crore through debt and equity. Many think the fund-raise will buoy the company and strengthen it.
Besides GQG Partners, Vi has got an impressive line-up of anchor investors which include foreigners Fidelity Management & Research, UBS and RWC and Indians HDFC Mutual Fund, Quant Mutual Fund and Motilal Oswal Mutual Fund.
Why Vi is full of hope
Vi is now a too-big-to-fail enterprise due to its nearly 20 crore subscriber base. Failure of Vodafone will be devastating for India's telecom sector as a whole because Jio and Airtel don’t have the capacity to absorb such a huge subscriber base of Vi. This will constrain their infrastructure and worsen service and quality standards.
The government, which is the biggest shareholder, currently holds around 32% stake in Vi, which is likely to come down to 24% after the FPO. It had converted dues into equity for Vi's inability to pay. A few days ago, Finance Secretary TV Somanathan said in an interview that preserving competition with multiple operators in the market is a major policy goal of the government. Many think this could mean the government converting more dues into equity in future.
Vi's hope stems from the ongoing fund-raise, expectation of the government help in future regarding the huge government dues Vi has to pay. and rise in tariffs.
Akshaya Moondra, the Vi CEO, says investors are confident about the India story and Vi's fortunes are closely connected to that. "Population is growing. Penetration is below where it should be. ARPUs are somewhere lowest in the world. So, telecom industry potential is there. As far as Vodafone Idea is concerned, they have seen 10 quarters of consistent performance with very limited investments, strong brand loyalty and some of the strength areas that we have our customer focus," he has told ET Now.
The funding is largely for growth capex. Vi has to expand its 4G network and start rolling out a 5G network. This will strengthen its network, allowing the company to arrest 4G market share losses in the near term, say analysts. Moondhra says customer acquisition will be no problem once they start expanding the 4G network
"If you were to ask me what is the reason we continue to lose subscribers disproportionately, there is only one reason, which is lack of 4G coverage, and it is quite significant because we could not invest after the AGR judgment," Moondhra said. "Now the point is that as we make these investments, today, if you will see our share of customer acquisitions, it is already higher than our customer market share which is the thing which most people do not realise, which means we are able to attract customers without difficulty wherever we have a service and a coverage of 4G coverage customers are coming to us."
Soon, a rise in tariffs is inevitable which will help Vodafone, Moondhra hopes. "Today India is about $2.1 of ARPU (average revenue per user) whereas China, a comparable size of population and economy, of course, its economy is larger, is over $6.5. So we are less than one-third of China's ARPU. So, by that benchmark there is a lot of room for ARPU to go up. The second is that today none of the players in the industry are returning their cost of capital. It has been six or seven years and the situation has got more accentuated," he said.
As per analysts, the fundraise will enable Vi to ramp up network capex and narrow the gap with Reliance Jio and Bharti Airtel on 4G coverage and 5G rollout. “Combined with potential tariff hikes after elections and possibility of AGR relief (matter pending in Supreme Court), this should significantly boost VIL’s cash flow position,” Citi Research said in a report.
Vi's challenges
Vi’s gross debt at the end of the third quarter stood at a huge Rs 2.14 lakh crore, comprising deferred spectrum payment obligations of Rs 1.38 lakh crore, adjusted gross revenue (AGR) liability of Rs 69,020 crore due to the government, dues of Rs 6,050 crore towards banks and financial institutions, and optionally convertible debentures amounting to Rs 1,660 crore. As the debt widened in the fiscal third quarter, cash and cash equivalents were at Rs 318.9 crore. The company says its bank debt now stands at less than Rs. 4,500 crore.
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The company has been reporting quarterly losses as well as losing subscribers to Airtel and Reliance Jio month after month.Many think the ongoing fund-raise can improve the fortunes of the company but temporarily. That’s because challenges remain in the long run, particularly after the second half of FY26, when the moratorium ends on spectrum and AGR payments.
Vi has lost 19% of its market share since Vodafone’s merger with Idea due to inadequate network spending. “We expect Vi to bridge the network coverage gap on 4G and arrest some of the market share losses. However, the gap in 5G coverage (versus larger peers) would still remain significant,” Kotak Institutional Equities says.
Further, the fortunes of Vi depend a lot on the government's decision to convert more dues into equity going forward. Analysts feel that the company may still face a cash shortfall post the second half of FY26 when the moratorium on adjusted gross revenue (AGR) dues and spectrum repayments ends. “…unless the government exercises the option to convert these dues into equity – this remains a key uncertainty from both a cash flow and an equity dilution perspective, and we await further developments,” Citi Research reckons.
“Even if we assume a 20% step change in tariff followed by a 10% per annum tariff compounding and no subscriber erosion, we estimate it would take Vi well over 20 years to organically pay back government obligations,” Macquarie said. It added that in the absence of government write-offs, this constrained cash flow and potential dilution dynamic remains a fundamental challenge.
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