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The never - ending troubles at Vi
7th August 2021
Reading time ~ 3 minutes
Hi there,
A new wave of troubles soared at Vi (Vodafone Idea) this week as KM Birla stepped down as Chairman. Let's take a look at what happened, and why the troubles at Vi seem to be never-ending. This is Part 1 of a two-part series on extraordinary circumstances - and in the next edition, we'll circle back on how such situations are usually dealt with by mutual funds, and why it's good for you to know that.
Vodafone India and Idea Cellular merged in 2018 into Vodafone Idea (Vi). Vodafone's parent company in the UK owns 45% of the company, while Idea's parent company - Aditya Birla Group owns 26%. KM Birla, up until recently, was the chairman of the board at Vi - he resigned this week.
Think of the telecom sector as the Plastics from The Mean Girls:
Up until 2016, Vodafone, Idea and Airtel were the popular kids, and all had a healthy number of subscribers and revenue - enough for everyone to be large and successful players in the market. Things of course took a turn once Jio entered, rapidly taking over the subscriber base - and now controlling more than a third of the total market.
In 2018, to compete against Jio, Vodafone and Idea formed an alliance and pooled in resources. However, they couldn't really stand a chance with Jio's mega cheap tariffs, rural connectivity and 4G rollout. The damage had already been done - Vi now has < 25% of the market share. Oh btw, BSNL is also in the running, but it's a distant player at the moment, controlling around 10% of the market.
Anyway, once Jio entered, the downward spiral started for Vi, but how did the state become so bad that their chairman resigned? It couldn't just be competition?
Enter: The AGR Issue
Last year, telecom companies lost a 14 year battle in the Supreme Court against the government on the AGR issue. Basically, the government and telecom companies work on an "Adjusted Gross Revenue (AGR)" method - which means that these companies have to pay a cut to the government on whatever these folks earn. And both parties are okay with this. The bigger part of the battle is actually on how the AGR is computed - i.e. what all kinds of revenue should be included in the AGR calculation. Companies think that only revenue from core telecom operations should be considered, while the government wants to include all kinds of revenue (such as earnings from the sale of assets, interest received, etc.). In effect, the government demanded upwards of INR 58000 crores from Vi - and Vi pretty much was like nuh-uh, we only owe around INR 21500 crores. They went to the Supreme court, which squashed their dreams last year and demanded that they pay up.
Take and minute and think about this - 58000 crores is a massive massive amount for any company, and even more so for one that is already struggling to keep a hold on its customer base.
On top of this, they also have to pay a huge sum for Spectrum* (around 96000 crores), along with servicing any regular debt that they may have taken on from banks/ larger investors.
In fact, a report from Motilal Oswal states that Vi would almost have to double the amount that it earns from each user (ARPU - Average Revenue Per User) if it wants to service this debt. And that's not really going to happen. The telecom industry is in a price war - the moment Vi increases tariffs, users will simply flock to a cheaper option: aka Jio. To top it all, Vi actually has been reporting decreasing ARPU - from INR 121 to INR 107. It's a sad state!!
So, given this gridlock, Vi has been asking the government to implement a floor price - like a minimum price on services that all telecom operators would have to follow. Without this, they say - there are very legitimate concerns on the continuity of the company. With KM Birla's exit, also came a letter to the government offering their company's stake in Vi to any government-approved entity. It basically mentioned that without the government's aid on (1) the AGR issue (2) approval of late payments of their Spectrum debt (3) Floor price - they would not be able to find any investors and Vi could very likely shut shop. P.S: Vodafone's UK parent company has refused to offer any cash in exchange for more ownership in the Indian entity.
Vi closing down would basically mean a duopoly in the telecom sector (i.e. the sector would be controlled by 2 key players - Jio and Airtel) - which is not in the best interests of consumers as well. Think about the power that the two players will have to set and increase prices - while consumers are left at the mercy of these two options. More so, it's very difficult for new entrants to set up shop in the telecom industry - considering the exorbitant infrastructure costs and existing competition. Further, this would also cause a massive revenue loss for the government.
So that's where we're at - a company with too much debt, no investors willing to give them money and a market they're rapidly losing share in. What's next? I guess we'll have to wait and watch if and how Vi is rescued. But this is definitely an extraordinary situation, and one that will set the tone for the future of the telecom sector. For now, I hope this made sense.
Next week → we'll talk about how mutual funds who might have invested in such companies deal with these situations through "segregated portfolios" and diversification and why it's important for you as an investor to know what that means.
Questions? Reach us at rujgupta@laana.club
*Spectrum: the radio frequencies (like 4G/ 5G airwaves) that are allocated to the telecom companies to facilitate communication like voice and video calls
Check out Part 2 of the post here. We talk more about how mutual funds deal with such situations.
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