Vodafone Idea May Choose Equity Conversion during Moratorium

Vodafone Idea might opt for the equity conversion for interest payout during moratorium period, resulting in sizable dilution and could restrict potential equity infusion from any financial/strategic investor, according to analysts. Emkay Global Financial Services said in a note that the package, that would focus on annual cash outflow deferral for telcos, provides much-needed relief to VIL.

According to reports, the government could hold anything between 30-70 per cent in Vodafone Idea with an equity option offered by the government for converting the company's dues after a four year moratorium. Operators have been given the option to convert their interest dues on spectrum and AGR payments, after a four year moratorium, into equity to the government. Emkay Global said the telecom package, which is focused on annual cash outflow deferral for telcos, provides much-needed relief to VIL.

In addition, it is a forward looking one, with long-term measures such as the elimination of SUC on future spectrum purchases, a change in AGR definition and reduction in bank guarantees.

The note says, "The package provides a huge relief to VIL for the next four years as the annual cash outgo toward government dues will reduce from Rs 253 billion starting in FY23E to Rs 31 billion, with an option of converting the same into equity for the government."

Although these measures will provide a lifeline for the next four years, annual payout to the government will increase substantially to Rs 477 billion from FY27E. Our estimates already factor in a 15-18 per cent tariff hike in H2FY22, which is essential for VIL to adequately invest in the business to stop the ongoing subscriber losses and comfortably fund interest charges on bank debt.

It further adds, "We believe VIL would opt for the equity conversion for interest payout during moratorium period, resulting in sizable dilution and might restrict potential equity infusion from any financial/strategic investor.”

"We are downgrading Bharti Airtel to Hold from Buy with an unchanged SoTP-based TP of Rs730. This is based on the visibility on VIL's survival for the next four years, imminent tariff hikes providing the cash-flow support for VIL to invest in the business, which in turn could restrict subscriber losses and the recent rally in Bharti's stock (up ~38 per cent in the last two months)," says Emkay.

"That said, our long-term thesis still favours Bharti as we believe VIL's survival will be in question once the moratorium ends in FY26-27E. Further, VIL's inability to invest in 5G, Home broadband and enterprise businesses will also adversely affect it in the long run. Significantly higher-than-expected tariff hikes and VIL's failure to bounce back strongly, along with sustained healthy return ratios for the sector, are the key upside risks to our call on Bharti," it added.

"We believe that Bharti and Jio would not opt for the moratorium as they have a comfortable liquidity position. Additionally, Bharti has recently announced a capital raise as well," it added.

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