Seven reasons why recent Telecom policy changes will help VIL not only survive, but thrive as well
Since the announcement of the final AGR verdict by Supreme Court of India, entire Telecom world had started believing that VIL will undergo gradual demise, in coming days. Also, there were strong reason to believe this hypothesis, as the liability of more than $25 billion seemed to be unserviceable, considering the current revenue profile of VIL (With ARPU of just above $ 1.5 per month !!!). However, the recent announcement has suddenly made the future prospects look brighter for VIL. The stock market has also given strong thumbs up by pushing up its valuation by a staggering 50% within a week, after possibility of a relief announcement by Government, appeared in the media. While some section of experts may term this as speculative, after studying the fine prints of the announcements.
We have strong reasons to believe that very soon VIL will emerge from the shadow of past and quickly gain growth momentum. We would like to elaborate seven reasons for this optimism towards VIL.
1. Significantly eases out the burden of short-term liabilities
This is the biggest immediate relief needed for ensuring survival of VIL. By allowing moratorium of up to 4 years for AGR and Spectrum payment liabilities, immediate relief of nearly $4 billion has been provided. In absence of such relief, VIL could not have survived.
2. Policy change for spectrum sharing to help monetize the assets
After merger of Vodafone and Idea, this entity has lost more than 40% of its customers. This has significantly reduced the utilization of spectrum. Since most of the customers have churned either to Bharti Airtel or Reliance JIO, both of these operators need to take spectrum on lease from all possible sources. The decisive step of government to scrap 0.5% levy on the spectrum sharing, will encourage the spectrum trading. This will also help VIL in monetizing the surplus spectrum, which will provide much needed relief to them.
3. Explicitly displayed the positive intent of Government to support the survival by extending all possible helping hands
Government has also provided additional relief measure by reducing interest rate to be levied as MCLR + 2%. This effectively results in an interest burden of around 8% at the prevailing rate. This is a very competitive rate and considering the current condition, it would have been impossible for VIL to raise capital at this rate of interest. Additional fiscal relief measures like exclusion of non-telecom revenue, rationalization for multiple Bank Guarantees (BG), annual compounding of interest instead of monthly compounding, additional interest on penalty etc. will help VIL immensely. In fact, VIL will be the biggest beneficiary of all fiscal relief measures.
4. Suddenly, investment in VIL appears much safer!
Policy also states that at the end of 4-year tenure, in case VIL is unable to repay the debt, the government will have the option to convert interest into equity. This gives a very clear message to the investors that the government will keep the possibility of handholding, even after the completion of moratorium tenure. All the steps taken by the government have suddenly made VIL very attractive for investors at the current valuation. Probably, this is the reason behind the skyrocketing market capitalization of VIL. Increased valuation will further increase the ability of VIL to raise fund from potential investors.
5. Opened the door for higher FDI, enabling quicker monetization of assets of VIL
VIL has large quantum of network assets like Optical fiber, Cell sites, Transport and Access Networks, Data Centers, Network Core etc. While it is imminent that VIL will offload all passive assets, finding a taker for active assets will have to wait until the policy comes into force for the creation of Access Service Providers (In August 2021, TRAI has already submitted recommendation for setting up Access Network Provider, akin to a carrier service provider. It is highly likely that DoT will accept this recommendation and notify before 5G spectrum auction). Allowing 100% automatic FDI in Telecom sector may pave the way for monetizing entire Network asset of VIL. This will help unlock huge value of VIL Active and Passive Network assets.
6. Sending strong message to possible Global investors
Rationalization of Tax and levies is primarily meant for sending very strong signal to Global investors that Government is willing to go the extra mile for inviting potential global investors in Telecom sector. One such example is - scrapping Spectrum Usage Charges (SUC) from current level of around 5% of Aggregated Gross Revenue (AGR). This is a radical step from the government, to make the policy consistent with practices followed by the most progressive countries. Additionally, recent step to end retrospective taxation rule, also sends very clear signal to global investors about zero risk of any retrospective taxation. This has always been a bone of contention with Vodafone group in the past. All these steps will help VIL attract more investors.
7. Last but not the least, Government stake is much higher than the current promoters
One of the major factors that would have put pressure on the government is the high stakes of the Government in VIL survival. Total exposure of the Government and the financial institutions in VIL is more than $20 billion. On the other hand, the liabilities of promoters are very less. In the event of bankruptcy, government would have been the biggest loser. Hence, it was widely expected that the government will take significant steps to save VIL. Also, demise of VIL would have led to duopoly in the Indian market, which is highly undesirable in a country of this scale.
The policy reforms and relief measures have, to a large extent, ensured the survival of VIL and unlike the situation in the past, the overall valuation of company will start improving.
However, VIL still requires a significant fund infusion in short term and major Capex investment for the long term growth. Most critical task in hand is to improve the network experience that will help prevent further reduction of market share.
Next logical step is the fund infusion from promoters that will send a strong positive signal to the potential global investors. Looking at the very positive reaction from VIL’s past chairman Mr. KM Birla, we may expect support from promoter group very soon. All these steps will ultimately lead VIL on strong growth trajectory.