ICICI Securities: Vodafone Idea can become a Govt Entity at Moratorium's End

ICICI Securities, Jefferies and other brokerage firms have said that Vodafone Idea could become a government entity after the 4-year moratorium.

Vodafone Idea a Govt Owned Telco Soon?

The telco can become a JV at the end of it all, if it goes for the option to pay the interest over AGR and spectrum by equity. Such a move would see the Center pick up a 26% stake in Vodafone Idea.

Under the recently announced telecom relief package, the government will introduce a mechanism that will allow telcos to convert interest into equity, which the Center will own. The government will also offer the telcos to convert their debt to equity as well.

In a note, ICICI Securities said, "with equity option, in the worst case, VIL can become a government entity. The government has provided the option to convert interest on deferred payment into equity which works to Rs. 94 billion; and at the end of four years, the government also has the option to convert the deferred installment into equity which works to Rs. 1,008 billion for VIL. Total equity conversion will be Rs. 1,102 billion in next four years on market cap of Rs. 260 billion".

It added that at the end of the moratorium, the equity conversion will cause an increased debt liability. Not only that, it will also lead to dilution of the stake of existing shareholders. At the end of the day, the government may end up becoming the largest shareholder of the telco.

Tariff Hikes, Fundraisers - What can Vi do to Survive?

Tariff hikes have been a difficult thing to achieve for all the telcos, and ICICI Securities have said that Vi needs an immediate hike. The telco needs to pay about Rs. 60 billion towards NCD payments. Furthermore, it has to renew BGs worth Rs. 120 billion within the next 12 months. However, further respite might come as the government can return those BGs.

The brokerage added, “it needs to get funding both in debt and equity for accelerating capex investment and meeting other liabilities, and without tariff hike, securing funding will be difficult. We see the possibility of 30-40% tariff hike in near future in the popular 4G prepaid category and postpaid".

Next, the telco needs to raise funds from somewhere. It has failed to raise the targeted Rs. 250 billion in funding, even though it has been trying for a year.

However, all is not bad for the telco. Jefferies said that the moratorium can offer the same amount of cash relief as the telco is trying to raise. "Per our calculations, the govt. could own 26% of VIL at the end of four-year period, if VIL chooses to pay the cumulative interest of Rs90bn over four years through equity, assuming shares are issued at CMP", Jefferies said.