Equity Conversion by Govt Seen as a Crucial Lifeline for Voda         Idea

The government’s decision to convert Vodafone Idea’s accrued interest into equity is a lifeline of sorts and sharply reduces the risks of the telecom operator getting dragged to the bankruptcy court anytime soon, said analysts.  Vi shares closed 19.88% higher at 8.26 on Monday on the BSE, surging more than 24% intraday, after the government agreed last Friday to convert the telco’s 16,133. 18 crore accrued interest on deferred adjusted gross revenue (AGR) dues into equity at 10 a share.  The move had come after the government received an assurance from Vi’s promoters that they were committed to the telco and would bring in the necessary funds.

Indus Towers shares ended nearly 13% higher at 161.95 on the BSE amid expectations that the dues conversion would help Vi get some existing bank debt refinanced and enable it to clear 100% of its current dues to the tower company.  The health of loss-making Vi is critical for Indus Towers’ long-term financial stability since the telco accounts for more than 40% of the tower company’s revenue.  However, the lossmaking Vi is likely to face an annual shortfall of about 24,700crore ($3 billion) in free cash flows (FCF) from 2026- 27, once spectrum payments resume, said analysts. This is since the dues conversion into equity amounts to about 16,100 crore debt reduction for Vi, which is barely 7% of the telco’s whopping 2.2 lakh crore net debt and won’t result in any immediate savings in FCF, said Goldman Sachs.  Analysts said Vi would face serious challenges in funding its annual spectrum payments after the four-year moratorium ends in 2024-25 unless its average revenue per user (ARPU) more than doubles to over 300.  Vi’s ARPU, a key performance metric, was a modest 131 at the end of September 2022.

Analysts, though, said Vi would continue to face challenges in raising cash unless the government takes a call on also converting the principal dues (out of Vi’s total government debt) into equity after the four-year moratorium ends in 2024-25.  Vi’s total government debt is pegged at about 1.89 lakh crore after the latest conversion of accrued interest on deferred AGR dues into equity. “Until there is clarity on whether the government will exercise the option of converting Vi’s principal dues into equity in FY26/ FY27, which could result in (further) significant dilution for existing shareholders- UK’s Vodafone and India’s Aditya Birla Group (ABG) the telco could find it difficult to raise new capital,” said Goldman Sachs. The global brokerage said while the government had said in January 2022 that it would look to sell its stake in Vi at an appropriate time to realise the due amounts, it had not clarified whether such a stake could be sold to a potential new entrant. S-ET

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