Vodafone Idea's inability to raise debt from external investors could increase equity requirements and push promoters to subscribe to the debt issuance too, according to a report by US financial services house Morgan Stanley.
The company has announced that the Board of Directors have approved a fund-raising plan through a mix of debt (debentures) up to Rs 150 billion and equity up to Rs 150 billion. The mix of equity and debt would be managed in a way so as to raise a maximum of Rs 250 billion and the proposal would be taken up for approval at the AGM scheduled on September 30.
"If the above proposal turns out to be successful, then it may be fair to assume that the market could continue to remain a three private player market at least for the next five years," the report said.
"Inability to raise debt from external investors could increase equity requirements and/or push promoters to subscribe to the debt issuance too," it added.
The note added that the success of this funding raise is critical as current leverage ratios are weak and debt investors will primarily look at leverage ratios such as net debt to EBITDA or net debt to Enterprise Value to understand whether the company will be able to refinance the debt at maturity (given FCF (free cash flow) generated in the business won't be enough to pay off the debt) and to ward off the risk of a negative equity value.
Debt investors will also look at the interest coverage ratio on the cash flow side to understand risk on interest payments.
"VIL already has a net debt to EBITDA of 27.6x after AGR and OTSC provisions (debt investors we spoke to generally found comfort at 3-4x levels in the case of telcos),and it has an interest coverage ratio (EBITDA to financial interest payments) anywhere between 1.5-2x (debt investors we spoke to generally found comfort with a ratio at 2.5-3x levels in the case of telcos)," it added.
Morgan Stanley said that a weakening FCF profile for VIL could require large tariff increases. VIL has been burning cash every quarter despite capex being significantly lower than peers. In the last 12 months, VIL's FCF burn was $2.5 billion with a capex outlay of $1.1 billion, whereas Airtel showed FCF improvement despite a capex of $3.3 billion.
With the additional burden of AGR payments and spectrum repayments resuming in F2023, ARPUs would need to be Rs 185 plus in the near term (vs Rs 114 in F1Q21) and Rs 225 in the medium to long term for FCF break-even for VIL.
The report predicts that the company could need anywhere between $2.5-3.5 billion in the next five years.
Subsequent to the Supreme Court ruling on the AGR case, tariff hikes and a fund raising by Vodafone Idea will become important for the company to pay off its opex and capex and to meet its repayment obligations (including financial debt, AGR and spectrum dues). The company has lost 9 ppt of revenue market share in the last eight quarters, leading to gains for Jio and Airtel.
"We expect Airtel and Jio to gain another 5 ppt by the end of F2021," the report said.