Voda Idea claims right issue to give it financial heft; Street doesn’t think so

The ongoing rights issue is offering 20 billion equity shares at Rs 12.50 per share.

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Brokerage Motilal Oswal says the rights issue will support liquidity only for 6-8 quarters and it would not turn Vodafone Idea self-sufficient.
Mumbai: While Vodafone Idea claims its Rs 25,000 crore fund raising through the ongoing rights issue will create a strong enough war chest to sail through the cut-throat competition, analysts have a different take.

The rights issue is now open for subscription and closes on April 24.

“When we had decided on this funding, the initial discussion was actually to have a lower level of funding. Then the questions kept coming whether you may need more funding, and whether you will need to raise more equity. So, the promoters decided to raise adequate equity at one time so that this question is behind us for all times to come,” Balesh Sharma, CEO Vodafone Idea, told ETMarkets.com in an interview.


The ongoing fund raising is one of the largest by any company in the country and is being done as the industry, running on wafer-thin margins for a while, faces a massive disruption due to the entry of Reliance Jio, which has already become the third-largest players by subscribers riding cheaper tariff and promising better service.

Vodafone Idea came into existence following the merger of the British telecom giant and Aditya Birla group's telecom venture last year.

The ongoing rights issue is offering 20 billion equity shares at Rs 12.50 per share, which is at a steep 60 per cent discount to the current market price. The Vodafone Idea stock traded 0.31 per cent down at Rs 16 on Monday.

“The size of equity raise is Rs 25,000 crore with a strong commitment from the promoters themselves to be the largest participants in the issue,” Sharma said, pointing out that the company already had a cash balance of Rs 13,600 crore. Plus, another tranche of funds is coming in from Indus monetisation, he said.
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Promoter groups Vodafone and Aditya Birla promise to infuse up to Rs 11,000 crore and Rs 7,250 crore, respectively, through the rights issue.

“In addition to that we have Ebitda coming in from operations and there are plans to improve that,” he said.

Sharma said with all this investment, the company is going to create a significantly higher capacity.

“That higher capacity will be used without any price increase in the market to migrate subscribers to higher Arpu plans, which will result in additional revenue and additional Ebitda. The base Ebitda plus cost reduction plus additional Ebitda from additional revenue from migration will give us operational Ebitda or operational cash,” Sharma said.

“The last point is, we have also talked about fibre monetisation. We have got 1,58,000 km of fibre, which this entity owns,” he pointed out.
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“Thus in totality we will have more than adequate cash available at the end of two years to continue operations and in addition to that by then with the base Ebitda, cost reduction and revenue increase, the Ebitda itself will be sufficient to take care of the funding requirements of capex and interest,” Sharma said.

Analysts do not agree.

Brokerage Motilal Oswal says the rights issue will support liquidity only for 6-8 quarters and it would not turn Vodafone Idea self-sufficient. The company may soon require additional funding, it said.

Analysts pointed that the company requires Rs 60,000 crore over the next eight quarters, while the rights issue of Rs 25,000 crore along with Idea’s Rs 5,000 crore stake sale in Indus, current cash position and cumulative Ebitda of Rs 22,000 crore can help it survive only until financial year 2020-21.

“Unlike Bharti’s fund raise, which will help it deleverage the balance sheet significantly, Vodafone Idea’s estimated annual capex requirement and interest burden of over Rs 20,000 crore in FY21 may not be met even with an optimistic Ebitda of Rs 12,600 crore,” Motilal Oswal analysts said in a note.

Without an increase in Arpu, the company may soon need another round of fund-raise to survive.

“This highlights Vodafone Idea’s desperate need for Arpu accretion over the next two years to survive without incremental funding, which could be seen as an advantage by competitors,” the analysts said.

Global brokerage CLSA said despite the large equity raising/dilution (97% of market-cap), Vodafone Idea’s gearing will still be out of control at 7-13 times over FY20-22.

“Further, assuming the management’s guided capex of Rs 27,000 crore over FY19-20, no non-spectrum debt repayment and our forecast of a four-fold jump in Ebitda over FY19-21, the infusion in our estimate will still fund losses only till FY21, post which the company will again need to raise funds,” CLSA analysts said.

Meanwhile, analysts across the board agree domestic telcos are not going to look up for a while.

“All the telecom players are between a rock and a hard place. They have to keep putting in good money after bad and that is the reality. The best days of the sector ended in 2007,” said Shankar Sharma, Joint Managing Director, First Global Stock Broking .

“Jio came only in the last one and a half years. Even prior to that, it was not looking very good as a sector. People miss the point when they think Jio has caused all this, and I would say that is not entirely true. The sector was already dying. Jio is just doing the last rites,” Sharma said.
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