Shares of Vodafone Idea (Vi) surged over 7% at ₹12.6 apiece on the BSE in Wednesday’s early deals after the stock tanked nearly 21% yesterday as the debt-ridden firm decided to opt for converting interest and AGR dues to the government into equity which will lead to the govt owning 35.8% stake in the telco.
Following the conversion, the Indian government will hold about 35.8% of the total outstanding shares of the company, and the promoter shareholders Vodafone Group would hold around 28.5% and Aditya Birla Group around 17.8%.
Analysts at Jefferies said that the government’s recent measures which offer a four-year moratorium on AGR and spectrum repayments will provide a ₹250 billion annual cashflow relief to Vodafone Idea and improve its chances of surviving for longer. Furthermore, “with Vi opting for conversion of interest on deferred payments to equity, the govt. will own 36% stake, which largely eliminates the possibility of an abrupt closure of its operations.”
The government gave telecom operators an option of paying interest for the four years of deferment on the deferred spectrum instalments and AGR dues by way of conversion into equity of the NPV (Net Present Value) of such interest amount.
Market share gains from Vodafone Idea will likely moderate in FY23 given the improvement in near-term cashflows. Furthermore, given that the Government will be the biggest lender and equity holder in VIL, Jefferies expects Reliance Jio and Bharti Airtel to shift their focus away from market share gains towards market expansion.
This rescue plan was crucial for Vodafone Idea, which has been losing customers to bigger rivals, especially after Reliance Jio sparked a brutal price war in 2016, and quickly clinched market share to become the top player.
“While the telecom package has definitely provided temporary relief to the company, significant ARPU growth remains the most critical factor for the company’s long term viability. ARPU needs to increase to ₹250, from it’s current INR109, over the next 3-4 years for it to sustain the leverage. We await further details regarding the conversion before making any changes in our estimates. Maintain ’REDUCE/SU’ with an unchanged target price of ₹7,” said Edelweiss in a note.
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
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