What are the chances of survival for Vodafone Idea Ltd?

I have been closely following the developments of the Telecom Sector in India since a long time & especially that of Vodafone Idea Ltd., from even before their Merger was formally announced. I have been sharing my views on the sector on a regular basis. This one I am writing after a gap of over 6 months.

During the last 6 to 8 months, there have been 2 big developments: (1) Reliance Jio's decision to start charging IUC from customers in early October'19; (2) The SC order on AGR case, which went brutally against Vodafone Idea & Bharti Airtel.

The First Big Development was terrific news for the entire Telecom sector in India. That was the first sign of tariff hike from Reliance Jio, which had single-handedly brought the sector to it's knees by launching revolutionary tariff plans a couple of years ago. Tariff hike from Reliance Jio meant that others in the business, i.e. Airtel & Vodafone Idea, too can think of charging more for their services. This was a very BIG Development for the sector & no wonder that we saw share prices of all these businesses rallying strongly.

Then came the Second Big Development, where the SC brutally thrashed the arguments of the Telecom Operators and asked them to make humongous payments towards disputed AGR dues + Interest for the last 1.5 decade + Penalties on delayed payment + Interest on those Penalties. The amounts being spoken are in excess of Rs.35,000 crores for Bharti Airtel and in excess of Rs.50,000 crores for Vodafone+Idea. Several pleas requesting SC to take sympathetic view & review it's Order have been thrashed again. Even when the Govt of India is ready to compromise, knowing fully well that the Huge amounts could crush the chances of survival for 1 of the only 3 major telecom players in the country, the SC is just not ready to budge.

The media & the stock market seem to have written off the chances of survival for Vodafone Idea Ltd. in the face of the repeated SC thrashing. Now let's look at some facts & try to analyse the chances of survival for the operator who was the largest one in the country until a few months ago. First let's look at the operational part. Have a look at the following charts which are representing the Quarterly Progress of 2 important numbers: Subscriber base and the company's Quarterly Total Income:

The merger of Vodafone India & Idea Cellular got legally effective from the end of August'2018. Hence the Total Income figures for June'18 & Sept'18 cannot be compared with following numbers. Let's look at the numbers from Q3FY19 (i.e. Dec'18) onwards. Vodafone Idea's subscriber base stood at about 387 million by the end of Dec'18, comprising of 72% 2G users, 19% 4G users & remaining 3G users. In the next 4 quarters, i.e. by the end of Dec'19, Vodafone Idea's total subscriber base dropped over 20% to reach 304 million. 61% of those were 2G users (33% drop in numbers), 34% of those were 4G users (38% jump) and remaining 5% were 3G users (56% drop).

This massive erosion of 2G & 3G subscriber base, resulting in over 21% drop in overall subscriber base, should have impacted the company's Total Income by atleast 15%, isn't it? But look at the Total Income chart. The drop is barely 5% in Vodafone Idea's Quarterly Total Income. That means the 29 million extra 4G customers that Vodafone Idea managed to add during those 4 Quarters, managed to compensate over 75% of loss of Revenues from the 112 million drop in 2G & 3G

customer base of the company. Now have a look at the chart alongside:

Between Q3FY19 and Q3FY20, the Data Volume carried by Vodafone Idea on it's network jumped 40%. This figure closely co-relates to the 38% jump in it's 4G customer base. During the same period, the Voice Calls traffic has dropped by about 12%, reflecting the drop in Voice-only users from it's network, despite increase in Voice usage by most users across the country due to Unlimited Calling Plans.

With every passing quarter, Vodafone Idea is launching it's stronger & higher capacity Integrated network in more & more districts. By the end of Dec'19, it had completed rollout of it's Integrated network in 86% of the districts. This will help the company increase it's aggression in capturing more & more 4G customers. In each of the last 2 quarters, Vodafone Idea added over 8 million 4G users to it's network. I think this figure can jump in coming quarters. Combine this with the near 30 to 40% tariff hike that the entire industry undertook in Dec'19, which will start reflecting in Revenue numbers for all operators from Q4FY20 onwards, and we will see Vodafone Idea getting much stronger than before. Even a 20 to 25% jump in ARPU will result in Vodafone Idea's Quarterly Revenues jumping by around Rs.2500 to 3000 crores. And with continued growth in 4G user base, this jump could be higher.

Survival past AGR issue: Assuming the worst case scenario that Vodafone Idea is made to pay over Rs.50,000 crores over the next 15 years or so, at an Interest Rate of about 8% p.a., Vodafone Idea will see it's Annual Interest Cost increase by about Rs.4,000 crores. It's Annual Interest cost currently stands at about Rs.14,000 crores, which will jump to about Rs.18,000 to 19,000 crores. With the recent tariff hike & aggressive push to increase it's 4G user base, I am expecting Vodafone Idea to be reporting Annual Revenues of over Rs.62,000 crores in FY'21, which could keep growing at a conservative figure of about 5% Y-o-Y for the next many years. Now all that it needs to do is to manage all it's Operating & Other Costs (including Lease Rentals) within a figure of about Rs.40,000 crores a year, which will allow it to survive in the next year and then get stronger again with every passing year. There are more possible positives in the form of potential Debt Restructuring to a lower Interest Rate after the recent slashing of Rates by the RBI and possible Fund Raising via sale of it's stake in Indus Towers and it's Fibre Assets. A 1% reduction in Interest Rate on all it's Borrowings alone can reduce it's annual Interest Cost by Rs.1,500 to 2000 crores.

Vodafone Plc and Aditya Birla Group together own almost 75% of Vodafone Idea. They are smart business people. I don't think any businessman would give up on a business which has the potential to generate well over Rs.10 lakh crores in Revenues and an EBITDA of over Rs.2.50 lakh crores over the next 15 years, just for the sake of avoiding a payment of Rs.50,000 crores or so. 

Jio vs Airtel vs Vodafone Idea - Subscriber Numbers upto July'19

Every month we have been reading reports of Reliance Jio adding a few million subscribers and Airtel + Vodafone Idea losing a few million of theirs. July'19 is no different. Reliance Jio maintained it's subscribers momentum with addition of another 8.5 million subscribers in July'19, taking it's total to almost 340 million. Vodafone Idea lost a smaller number of users compared to the previous 2 months. It's total subscriber base now stands at 380 million, down by 3.4 million. Airtel has now included Tata Tele's subscribers in it's count. Tata Tele had about 11.5 million subscribers in June'19. But Airtel+Tata Tele's subscriber count has jumped from 320.3 million in June'19 to 328.5 million in July'19. That means Airtel also lost nearly 3.2 million subscribers during July'19.

All the three operators have seen their VLR % erode during July'19. Starting with Airtel, it's own VLR % at the end of June'19 was 98.5%, which dropped to 94.95% in July'19. This is mainly due to addition of Tata Tele's subscribers in it's total count. Most of these Tata Tele's subscribers were already using Airtel's network on Roaming. Hence this had helped boost Airtel's VLR % for the previous few months, as can be seen from the table alongside. Airtel's VLR base has dropped from 315.5 million to 311.9 million, i.e. a drop of 3.6 million active users. The same at the end of January'19 was 331.2 million. That means Airtel has lost close to 16 million active users during these 6 months.

Looking at Vodafone Idea, it is already tainted to be the worst performing Telecom operator in terms of subscriber & revenue growth in the recent months. The effects of large-scale Network Integration activity across several circles has had a severe impact on Vodafone Idea's active subscribers count post March'19. At the end of March'19, Vodafone Idea's Total subscribers were 395 million, which is now down to 380 million, i.e. a loss of just 15 million users in 4 months time. Nothing alarming. But during the same period, it's VLR % has dropped from 93.3% to 81.9%, in a staggered manner. This means it's active subscriber count has dropped from 368 million to 311 million over those 4 months, i.e. a loss of 57 million, which is large figure. An average of over 14 million a month!! This is substantially more than what Jio is adding every month.

Over the last month or so, we have seen several announcements from Vodafone Idea about launch of TurboNet 4G services in more & more cities across the country. TurboNet 4G is the brand they have adopted for announcing the launch of Integrated network for Vodafone & Idea combined. TurboNet 4G also represents the launch of a network which is expected to offer wider coverage & much larger capacity than before, with the help of the largest spectrum pool amongst all operators in India. This should help improve adoption of 4G services amongst Vodafone & Idea users and also attract users from rival networks. We may not see much of it's effect in August numbers, but I am sure we will start seeing a boost in numbers for Vodafone Idea from September'19 onwards. Apart from launch of TurboNet 4G, Vodafone Idea has also introduced lower denomination recharge options for users to remain active on the network.

Coming to Reliance Jio, it's monthly subscriber addition numbers have been very consistent. It seems as if the company is despatching only a limited number of simcards / Jio Phones every month. For the 6 months between January to July'19, Jio's Total subscriber base went up from 289 million to 340 million, i.e. 51 million new additions translating into 8.5 million every month. That is precisely the number they are adding every month. Even their VLR % is steady around the 83-84% mark. Looks like everything is working in a very measured fashion. Sometimes even raises a doubt in my mind whether these are genuine numbers or manufactured ones.

Airtel & Vodafone Idea are now neck-to-neck in terms of active subscribers. It will be an interesting race from September'19 onwards. Airtel might inch ahead in August as Vodafone Idea's TurboNet 4G marketing started only in the latter half of August. In about 4 to 5 months time, Jio will close the gap between it's Active base numbers and the other two, which currently stands at about 29 million. And most probably Jio will just zoom past both of them. Both Airtel & Vodafone Idea are unlikely to offer something like the Jio Phone, which is what is pulling major numbers for Reliance Jio since the last couple of years. Both Airtel & Vodafone Idea will prefer to expand their 4G network coverage to get closer to that offered by Jio currently and target the Smartphone users to upgrade to 4G or pull a few dis-satisfied users from Jio or BSNL.

That brings us to the comparison of Wireless Broadband numbers of the 3 operators. Jio's entire subscriber base is counted as Broadband user base as it's 4G-only network. In case of both Airtel & Vodafone Idea, it comprises of 4G and 3G subscribers. The 3G subscriber base for both operators is rapidly falling. Both have less than 25 million 3G users on their Networks as of July'19. By the end of this year, both operators are expected to shut down 3G networks as the same spectrum can be used to add to their 4G capacity. So all these 40 to 50 million 3G users will be forced to upgrade their handsets and start availing 4G services over the next 3 to 6 months.

Airtel's Wireless Broadband user base has been steadily increasing over the last 6 months. It went from 110 million in January'19 to over 121 million in July'19, i.e. at a pace of almost 2 million a month. On the other hand, Vodafone Idea had a tough time trying to maintain it's wireless broadband user numbers between February'19 to May'19, when it lost about 1.25 million users. It has seen some increase for the last 2 months of June & July'19. I am pretty sure that this will pick up pace from September'19 onwards & we could see Vodafone Idea adding 2 million+ Wireless Broadband users every month. This race between Airtel and Vodafone Idea will get very interesting by the end of 2019. I am excited to see which one of the two proves to be a bigger challenger to Jio in the year 2020. So far we all know that Airtel has performed better than Vodafone Idea. But there are reasons for the same. As Vodafone Idea starts pushing it's upgraded network services through formal advertisement channels, we should see the company numbers start improving.