The struggling telecom player Vodafone Idea (Vi) got a breather this week as the government announced a relief package for the telecom sector which includes a moratorium on adjusted gross revenues (AGR) payments.
Vi, though, may have received the first survival dose by way of a relief package but its woes are far from over. The fate is still hanging by a thread. Unless, there is a tariff revision upwards, it will always be a difficult road to tread especially for Vi. Though, Airtel and Reliance Jio will benefit from tariff hikes too.
For Vi, an immediate fund infusion for network expansion is also critical. The company has been trying to raise Rs 25,000 crore for a year. Without substantial expansion, it won’t be able to retain its users which have been leaving the sinking ship and shifting to competitors.
Analysts from Kotak say Vi may remain a fragile player with a declining subscriber base given its inability to catch up with Airtel and Jio on network capabilities and service offerings.
The players need to improve their profitability via average revenue per user (ARPU) post revision in tariffs. Airtel and Vi though have already tweaked some of their tariff plans but more needs to be done to reach an optimum level.
Source: Company reports, CRISIL Research
Not to forget that the government is working on a mechanism that will give Vi and other telcos the option of converting interest accruing on their dues over the four-year moratorium into equity to be owned by the Centre. This is in addition to the government having the option of converting a part of their dues into equity
As Care Ratings put it aptly for the telecom players, the real litmus test will be their ability to raise tariffs in the near to medium term.
The measures together will free up cash of about Rs 45,000 crore annually for the telecom players along with the release of Bank Guarantee (BG) limits of around Rs 30,000-32,000 crore. The package will also offer telcos enough liquidity for the near term.
Telecom minister Ashwani Vaishnav while announcing the relief package said the government hopes to change the course of the telecom sector through its latest reform move and make it viable for investors.
There should be healthy competition in the sector. “Competition is extremely important for the telecom industry to offer choice to customers. This right has to be protected. The reforms are to ensure healthy competition and attract new players…there will be further reforms when we auction 5G so more players can enter the sector,” the minister said.
The biggest beneficiary of the relief package will be Vi, which needs immediate relief to survive as it has been reeling under Rs 1.9 lakh-crore of debt, out of which Rs 1.6 lakh crore are government dues.
All the top heads of the three telecom players including promoters hailed the government’s announcement. Vi’s promoters said the relief measures would ensure healthy growth and go a long way in unshackling the telecom sector. UK’s Vodafone Group and the Aditya Birla Group, promoters of Vodafone Idea, have so far refused to invest fresh equity into the struggling telecom player.
Chairman of Bharti Enterprises Sunil Mittal has already announced opting for the option to defer AGR payment to the government for 4 years. In an aim to unite the industry, Mittal has reached out to Vodafone Group CEO Nick Read and said it is time for Vodafone and Chairman of Aditya Birla Group Kumar Mangalam Birla to step up their contribution into the company.
In a media roundtable, he said he will call up Mukesh Ambani, Chairman of Reliance Industries. Ambani called the announcement a timely step towards strengthening India’s telecom sector and said the reforms will encourage Jio to bring newer and greater benefits to the users.
Pertinent to mention here that post the entry of Jio, the data consumption in India surged as prices spiralled down with Jio offering free voice calls and dirt-cheap data tariffs. The intensified competition became a boon for mobile users but brought in a disruption in the telecom industry which is now left to three private players plus a PSU.
Post the relief package, the game changer will be tariff revisions and the stage is set.