Why the government could be the biggest loser if Vodafone Idea fails

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The crisis at Vodafone Idea (VIL) has worsened in recent days after the Supreme Court rejected requests from telecom companies to recalculate adjusted gross revenue payable to the government.

A big question is what if Vodafone Idea fails? The company has been losing customers for quite some time. Yet, according to the Telecom Regulatory Authority of India, VIL had 277.62 million subscribers at the end of May. The company also has thousands of employees. Great uncertainty hangs over them if the business is not saved.

Kumar Mangalam Birla has written to the government to speak of an irremediable point of collapse and has even offered to divest his stake. Vodafone has also made it clear that it will no longer invest equity in VIL.

The industry, which once had more than a dozen operators, has been reduced to just three, with the exception of the state-owned BSNL. If VIL were to collapse, the absorptive capacity of its subscribers and employees in a short period of time would be a great uncertainty.

Perhaps the biggest loser could be the government itself. In 2019, when the Supreme Court struck a blow to carriers by ordering that carriers must include non-essential income in their AGR payments and should also pay penalties and interest, the government was looking at a huge windfall of thousands of crore in additional income.

Vodafone Idea, which merged its companies in 2018, is itself expected to pay more than Rs 58,000 crore in AGR contributions. But now there is a real possibility that the government will lose all of this and a little more in other debts like deferred spectrum payments.

According to various estimates, VIL owes around Rs 1.5 to 1.6 lakh crore to the government. He has Rs 16,000 crore for the annual spectrum payment and Rs 8,400 crore for the upcoming AGR dues in March, April 2022 itself. But, with a loss of Rs 44,233 crore during the year ended March 2021, he is unable to repay his debts, which amounted to Rs 1.86 lakh crore (including accrued interest , but not due and the AGR debt) as of March 31.

“It has become very difficult for VIL to service its enormous net debt at 10 times its net debt / EBITDA (earnings before interest, taxes, depreciation and amortization), in this pricing environment where prices are well below sustainable level. Now the promoters have refused to inject additional equity into the business. With KM Birla’s resignation as chairman and the current state of the company’s finances, it would be difficult to raise funds from other institutional investors, ”said Piyush Pandey, Senior Analyst – Institutional Equities, Yes Securities .

The collapse of VIL is clearly going to create a big hole in government revenue. Banks, too, are seeing another hole in their balance sheets and a jump in their non-performing assets.

“The group’s liquidity situation is poor with 7,000 crore of debt maturing in fiscal year 22 and the AGR due.

payments are likely from next year. VI also has negative net worth and therefore could be a potential risk for higher NPLs (non-performing loans) for the industry and some banks, ”Nomura Securities analysts said.

According to the brokerage firm, the country’s largest state bank, the State Bank of India, is the most exposed to the ILV in terms of value, at Rs 11,000 crore. Another state lender, the Punjab National Bank, has an exposure of Rs 3,000 crore. Several private banks, including Yes Bank, IDFC First Bank, IndusInd Bank, Axis Bank, ICICI Bank and HDFC Bank, are exposed to VIL.

For larger lenders like SBI, as a percentage of the loan portfolio, VIL is only 0.5 percent. But, it is more worrying for small lenders like IDFC First Bank, Yes Bank and IndusInd Bank.

The three banks’ absolute exposure to VIL stands at Rs 3,240 crore, Rs 4,000 crore and Rs 3,500 crore, respectively, according to Nomura. As a percentage of the loan portfolio, this translates to 3 percent, 2.4 percent and 1.7 percent, respectively. The VIL exposure is 16.1% of the equity of IDFC First Bank, 12% for Yes Bank and 7.9% for IndusInd Bank.

“VI has around Rs 92,300 crore of deferred spectrum payment obligations, against which, in our opinion, banks have issued bank guarantees only for the portion of current liabilities. The gross exposure not funded by banks is Rs 23,700 crore. In the event of default, only those current unfunded exposures are converted to debt and subsequently treated as an NPL, ”Nomura analysts said.

So it is clear that in a situation where VIL fails, the banks and more so the government are considering huge haircuts.

With developers unwilling to invest more money and still elusive external funding, the government could find itself with few options to bail out the struggling telecommunications company. The government is reportedly working on a back-up plan for the area. It could certainly offer some relief. But, there is no official government response yet to Birla’s letter which was reportedly written in June.

Some experts also believe that the government should take over VIL and merge it with BSNL.

The telecoms ministry reportedly held a meeting with senior bankers last Friday to discuss the VIL issue. While VIL has not yet defaulted, some of the lenders may have already started making arrangements to prepare for such an eventuality.

The government may well convert debt into equity. It could help the banks as well as the government. But it will also make the banks a major shareholder in the loss-making telecommunications company.

Narendra Modi’s government has been pushing hard for a “Digital India” initiative for a few years now. The telecommunications sector is essential for this to succeed and develop. A collapse of a telecommunications company will clearly hamper that.

There is no doubt that the government must act quickly in the case of VIL and the telecommunications industry at large. The actions he is taking now must be carefully monitored.

India’s telecommunications sector has been among the most dynamic and there remains enormous potential for growth, as internet penetration remains low compared to other markets and many people in the back- Indian country do not have access to telecommunications services.

This should ideally attract more investors and companies to the market. Instead, there has been a wave of consolidation over the past few years, with companies finding it difficult in an environment of extremely low prices. A collapse of VIL could further reduce investor appetite in the sector.


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