It doesn’t take an accountant to surmise Vodafone Idea is facing a fight for its existence after a quick glance at its latest earnings.

The only bright spot was rising ARPU.

Since the merger of Vodafone India and Idea Cellular in 2018, the company lost nearly 200 million customers, with its mobile user base falling 13.4 million year-on-year to 215.2 million at end-2023.

Interest and financing costs in fiscal Q3 2024 (ending 31 December 2023) were up 3.3 per cent to IDR64.9 billion ($782.2 million), representing a staggering 60.8 per cent of total revenue, which was flat at INR106.7 billion.

With a net debt burden of INR2.2 trillion, it is little surprise Vodafone Idea registered another quarterly net loss, albeit down 12.5 per cent from fiscal Q3 2023 to INR69.9 billion.

In addition to INR1.4 trillion in deferred spectrum payment obligations and an adjusted gross revenue (AGR) liability of INR690.2 billion owed to the government, its debt from banks and financial institutions totals INR60.5 billion, down by INR71.4 billion from fiscal Q3 2023.

The huge debt is what remains after the government took a 33.1 per cent in the operator when it converted accrued interest towards AGR arrears into equity.

There is much talk of the government boosting its ownership to as high as 70 per cent by exercising an option to convert debt into equity. But any move by the state must wait until fiscal Q3 2026, when a moratorium on spectrum payments ends.

Vodafone Group’s stake in the operator fell to 32.3 per cent, while Aditya Birla Group has an 18.1 per cent interest.

Network underspend
Vodafone Idea’s capex in the first three quarters of fiscal 2024 fell 56 per cent to INR13 billion.

The cuts come as rivals Reliance Jio and Bharti Airtel splurged a billion on 5G spectrum and networks over the past 18 months, claiming nationwide coverage across all cities and towns. 

Vodafone Idea acquired $2.4 billion-worth of spectrum in a 5G auction in 2022, an eighth of what Jio spent and less than half of Airtel’s outlay.

In an earnings report, Vodafone Idea highlighted its spectrum holding as a strength, with about 8,000MHz across the 3.3GHz and 26GHz bands in 17 regions and 16 regions, respectively.

Unfortunately, the mid-band and mmWave 5G spectrum is adding limited value, because Vodafone Idea is yet to roll out a 5G network.

Airtel’s capex as a percentage of revenue climbed to 31 per cent in the first half of fiscal 2024 (ending 31 March). But Moody’s Investor Services forecasts 5G spending to ease over the next two years and the percentage to return to between 24 per cent and 26 per cent over the next two fiscal years.

The operator booked healthy profit and revenue growth, and is making early payments on its spectrum liabilities, paying down INR83.3 billion last week.

In total it prepaid INR163 billion to the government in fiscal 2024. 

Reliance Jio made an early payment of INR307.9 billion in 2022, covering deferred liabilities including interest relating to spectrum acquired in auctions in 2014, 2015 and 2016, along with purchases from Airtel in August 2021.

By contrast, Vodafone Idea faces INR400 billion in additional payments from early calendar 2026 when a moratorium offered by the government as part of a relief package in 2021 ends.  

Rising tariffs
The one bright spot for Vodafone Idea is rising ARPU, which increased 7.4 per cent to INR145 at the end of calendar 2023, after growing 17.4 per cent in 2022.

On its earnings call, Vodafone Idea CEO Akshaya Moondra again noted it remains “engaged with various parties for fundraising to make required investments for network expansion”, a constant theme over at least the past 12 months.

Moondra also revealed plans to launch 5G services in about six months after securing new funding, without elaborating.

Goldman Sachs estimates Vodafone Idea requires new capital of $8 billion to $10 billion to improve its competitive positioning, highlighting it risks an acceleration in subscriber losses without a 5G offering.

The possibility of attracting new investors is a widening challenge given its massive debt, the end of the payment moratorium is less than two years away, a declining user base and the prospect of the government raising its stake by converting debt for equity.

Even if can line up sufficient funding or the government steps in to ensure the country keeps three major mobile players (to avoid going the direction of Thailand which is now a duopoly), the operator faces an uphill battle to quickly rollout a nationwide 5G network and attract new customers without undercutting prices, which have improved steadily over the past two years.