Why Vodafone Idea (VI is falling down? VI stock Analysis

Vodafone Idea is a partnership between two promoters, Aditya Birla Group and Vodafone Group, and it is India’s third largest telecommunications provider in India, offering voice, data, enterprise services, and other value-added services (VAS), including short messaging services, digital services, and IoT services. 

As of March 31, 2024, the subscriber market share of the company stands at 20.7% as per the TRAI subscription report.  

Vodafone Idea provides 4G coverage to more than 1 billion Indians as it continues to make significant improvements in its services. VI is also focusing on the digital-first approach, digitizing all its customer touchpoints. They launched Vi One, which offers broadband + mobility + OTT services under one plan.  

Warren Buffet says that you should never invest in a business that you don’t understand. It is very important for us to learn about the specifics of a business and its unique characteristics, which vary across industries. Each industry would have a set of parameters that are critical to assess the business. We will discuss a few such terms & parameters that are relevant to the telecom sector. 

Key Terminology: 

Spectrum: In telecommunications, spectrum is the range of electro-magnetic frequencies used for communication. It is the invisible radio frequencies that wireless signals travel over, allowing us to make calls, access the internet, and more. Spectrum is a finite resource that needs to be managed carefully to prevent services from interfering with each other.  

• Different bands of spectrum make them suitable for different purposes. Lower frequency bands are suitable for better positioning, in-building penetration, and wide-area network coverage.  

• Coverage and capacity bands allow mobile operators to connect more people and offer faster speeds.  

Tele-density: Tele-density refers to the number of telephone connections for every 100 people in a specific region or country. It’s an important indicator of telecommunications infrastructure and access. For example, if a country has a tele-density of 80, it means there are 80 telephone connections (both landline and mobile) for every 100 people. High tele-density usually indicates a well-developed telecommunications network and widespread access to communication services.  

Churn Rate: Churn rate is the percentage of subscribers who leave a telecom service provider over a given period. It’s calculated by dividing the number of lost customers by the total number of customers at the beginning of the period. 

BTS (Base Transceiver Station): A BTS is the equipment in a mobile network that enables wireless communication between user devices (like smartphones) and the network. It transmits and receives radio signals, connecting devices to the network and ensuring continuous services as users move around.  

FWA (Fixed Wireless Access): A method of connecting customers to the internet using wireless technology instead of traditional wired connections. FWA is crucial in areas with limited fiber or cable infrastructure. 

Industry Overview:  

The mobile telecommunications industry being an integral part of the Indian economy has contributed significantly to the economic growth and GDP of the country over the last three decades.  

India is the second-largest wireless market in the world. Its total wireless subscriber base reached 1,165 million as of March 2024. It is important to note that the industry has added 21.6 million subscribers and witnessed a growth of approximately 2% during FY 2023–24. The overall tele-density increased from 82.5% in FY23 to 83.3% in FY24. However, it is still low at ~83% in comparison with other global markets.  

India also ranks as the world’s second-largest market in terms of wireless internet subscribers. The number of wireless internet subscribers in the country increased at a CAGR of over 10% during the last 5 years to reach 884 million in FY24.  

Total wireless data usage in India grew 3.5x during the last 5 years, from December 2018 to December 2023. Average Wireless Data Usage per wireless data subscriber per month stood at 19.47 GB in December 2023 compared to 8.74 GB in December 2018. 

The telecom industry occupies a unique position at the nexus of technological change, geopolitical strain, economic shift, and societal development. The sector provides vital services on which billions of consumers and virtually all businesses rely.  

The Indian telecom sector has witnessed remarkable growth during the financial year 2023-2024, as highlighted in the annual report released by the Telecom Regulatory Authority of India (TRAI).  

The report highlighted significant growth trends and key parameters across various services. The report also showed that the overall tele-density in India increased from 84.51% at the end of March 2023 to 85.69% at the end of March 2024. 

The consolidation of the industry to three private operators and one government operator presents a unique situation amid the growth opportunities, digitization trend and the government’s vision of Digital India.  

Before we move on the company’s specifics, it is important to understand an important activity that telecom companies involve in, ‘Spectrum Auctions’. 

Understanding Spectrum Auctions:  

A spectrum auction is a process where the government auctions the rights to transmit signals over specific bands of the electromagnetic spectrum, which is essential for telecom operators to provide wireless services like mobile voice, data, and the internet. The government manages this finite, public resource—similar to water, air, or land—through regulatory bodies like the Department of Telecommunications (DoT) and the Telecom Regulatory Authority of India (TRAI). These agencies ensure the spectrum is allocated efficiently, fairly, and in a manner that avoids interference, which is critical for reliable communication services.  

Moreover, the spectrum is not only a commercial asset but also holds significant economic and strategic value. The government regulates and allocates it to balance these interests, reserving certain bands for defense, broadcasting, and emergency services.  

As we are discussing what a spectrum auction is, let’s also discuss how the government will sell spectrum.  

There is a simple process that happens in the process of selling spectrum:  

1. Determining Spectrum Availability: The government first identifies which parts of the spectrum are available to be sold. This could include unused spectrum or spectrum that’s being repurposed from other uses.  

2. Setting Reserve Prices: A reserve price, or the minimum price the government is willing to accept for the spectrum, is set. This price is determined with help from experts and stakeholders.  

3. Auction Process:  

• Invitation to Bid: Telecom companies are invited to participate in the auction. These companies bid for the spectrum in different frequency bands and regions, depending on their needs for expanding services.  

• Bidding: The auction is conducted online. Telecom companies place bids, and the auction continues until no higher bids are made.  

• Winner Determination: The company that bids the highest wins the right to use the spectrum for a specified period, usually 10 to 20 years.  

4. Payment and Allocation: The winning bidders must pay the amount that they bid. Sometimes, the government allows companies to pay in installments. After payment, the spectrum is officially assigned to the winning companies.  

5. Usage and Compliance: The companies that win the spectrum use it to provide services like mobile phones and internet access. They must follow certain rules and meet specific standards set by the government.  

To get a clear idea about the auction, let’s look at the real data:  

In July-August 2022, an auction was conducted for spectrum in the 600 MHz, 700 MHz, 800 MHz, 900 MHz, 1800 MHz, 2100 MHz, 2300 MHz, 2500 MHz, 3300 MHz, and 26 GHz bands. A total of 72097.85 MHz spectrum in different band-LSA combinations is worth INR. 4,31,605 crores were made available for bidding. A quantum of 51236.2 MHz worth INR 150173.3 crores was sold in the auction.  

However, no bids were received in the 600 MHz and 2300 MHz  

The expiring spectrum in 2024 and the unsold spectrum of the previous spectrum auction held in 2022 were put to auction this year to meet the spectrum requirements of telecom service providers (TSPs) to ensure continuity and growth of the services.  

Strengths:  

• Competitive Spectrum profile: Vodafone Idea currently holds a total of 8,030 MHz of spectrum across various frequency bands, including spectrum acquired in the June 2024 auction. Of this, 8,012.8 MHz is liberalized, allowing the company to deploy any technology across these frequencies. Recently, the company acquired sub-GHz spectrum (900 MHz band) in seven circles—Andhra Pradesh, Tamil Nadu, Karnataka, Punjab, Rajasthan, Uttar Pradesh (East), and Kolkata—dedicating it to enhance 4G services, particularly improving indoor coverage. Additionally, the company has secured 1800 MHz spectrum in Madhya Pradesh and 2500 MHz spectrum in Bihar to increase network capacity swiftly. Vodafone Idea also holds mid-band 5G spectrum (3300 MHz band) in 17 priority service areas and mm wave 5G spectrum (26 GHz band) in 16 service areas.  

• FPO: Vodafone Idea launched an INR 18,000 crore FPO in the month of April 2024. It was a huge success as the company raised the required amount. The objectives of the FPO were to: 

• Debt Reduction: A significant portion of the proceeds might be allocated towards reducing the company’s debt, improving its financial health and creditworthiness.  

• Network Upgradation: The FPO could fund network modernization and expansion, allowing Vi to compete effectively in the growing 4G and 5G markets.  

• Operational Improvements: The capital raised might be used to streamline operations, improve customer service, and potentially lower operational costs.  

Risks:  

• Decline in the subscriber base: The merger of Vodafone and Idea on August 31, 2018 led to the creation of VI. The subscriber base according to the annual report released recently mentioned that VI had a large subscriber base of 219.8 million customers. This signifies a market share of 18.9%. So, why is it considered risky?  

• Well, if we look at the annual report of one particular year, this seems to be a good number standalone, but when we analyzed the past 5 years’ annual report, we found something interesting: 

• In the FY20 Annual Report, the overall subscriber base stood at 293.7 million, which signified a market share of 29.7%. As per the FY21 report, the subscriber base decreased to 255.7 million & a market share of 25.7% from the highs of 2020. 

• A declining clientele is a serious risk that investors need to keep in mind. This also serves as a reminder of why it is good to analyze multiple years of annual report data.  

• Strong competition: In September 2016, the market witnessed the disruptive entry of Reliance Jio in voice and data services using 4G technology. Data prices saw an immediate decline from Rs. 180 per GB in September 2016 to Rs. 160 per GB in December 2016 and a secular decline to Rs. 6.98 per GB in 2019. While growth has been robust, price competition has squeezed the bottom line for incumbent operators. To lower costs and improve survival, smaller players were acquired, while big operators like Vodafone and Idea merged. The decline in subscriber base of VI is also exacerbated by the heavy competition in this particular sector.  

• Huge Investments: Telecom players require substantial capital to purchase the spectrum through government auctions, establish and maintain their network infrastructure.  

• The industry spent INR 1500 billion during the 5G auction in 2022. Not just that, Indian telecom operators have spent nearly INR 3000 billion since 2014 to acquire spectrum across various bands. The telecom sector has a low average asset turnover ratio of 0.3 times (fiscals 2020–23), indicating high capex requirements on a sustained basis. Capex intensity is high and estimated at ~30% of total revenue in fiscal 2023 and ~25% in fiscals 2024 and 2025. High costs of spectrum acquisition and the demands of network upgrade had increased the industry debt burden. Technological disruption and tariff competition triggered by Jio entry jointly aggravated the financial distress, which resulted in the decline in revenues of the industry.  

• AGR Issue: Vodafone Idea has challenged the Department of Telecommunications’ (DoT) calculation of adjusted gross revenue (AGR) dues, claiming that the DoT made errors and that Vodafone Idea wasn’t given a hearing before the penalty was imposed.  

• As of February 2024, Vodafone Idea had a debt of over Rs 2,01,829 crore, with 97% of that owed to the government for AGR and deferred spectrum payment.  

• Payment Dues: In June 2024, Vodafone Group sold 18% of its stake in Indus Towers to Bharti Airtel for €1.7 billion (₹15,300 crore) to repay a loan. The sale was prompted by pressure from lenders, including BNP Paribas, HSBC, and Bank of America, who demanded full repayment and rejected refinancing efforts. 

Financials: 

Vodafone Idea appears to be a company struggling to maintain a stable financial footing. The fluctuations in sales and OPM suggest an unstable business environment and weak market positioning. The persistent and significant net losses over the years are alarming and the company has not been able to turn its business around effectively.  

To turn the business around, VI might need to undertake significant strategic reforms, such as restructuring debt, focusing on core profitable segments, or finding new revenue streams. Without these changes, the company might continue to struggle with profitability.  

Debt-burden: On March 31, 2024, current and noncurrent borrowings were INR2,156,839 million (including interest accrued but not due), of which loans from banks and others are INR 42,126 million, and deferred payment obligations towards spectrum and AGR liabilities were INR 2,114,713 million, and bank guarantees were 58,898 million.  

Shareholding pattern:  

The promoters’ stake has seen a significant decline from 71.33% in March 2019 to 37.18% in July 2024. This steady reduction suggests that the promoters have been offloading their shares, likely to raise capital and due to financial pressures.  

The government’s stake in VI emerged in March 2023, reaching 33.18%. Vodafone Idea approved the allotment of equity shares worth INR 16,133 crore to the government which post-allocation has become the largest shareholder in 2023, with a 33.18% stake in the company.  

The shares have been allocated to the government in lieu of conversion of interest dues arising from deferment of adjusted gross revenue and spectrum auction payments, as per the company.  

By July 2024, the government’s stake had reduced slightly to 23.18%, indicating some offloading or restructuring.  

This happened after the FPO which is done by the company in 2024. After the FPO, government holdings came down to 23.18%. 

The FIIs participation has increased over the period and during the FPO, they shown huge interest and increased their stakes in VI and stake rose up to 12.78%.  

Growth triggers:  

Low ARPU: ARPU stands for Average Revenue Per User, a key metric and KPI for the telecom industry. ARPU decides a lot of factors in the financials of the company. The higher the ARPU, the better the margins, sales, and profits will be, and it will be easier for the telecoms to sustain in this capital-intensive industry. In 1999, the telecom industry’s ARPU was INR 1,319 and gradually reduced to INR 205 by 2009.  

• But surprisingly, with the entry of Jio, the ARPU fell drastically to 74.8 in 2019. It actually reduced the revenues of the companies operating in the telecom industry. But we need to understand how it may shape growth in the future. 

• India and China have the lowest tariffs in comparison to other countries. China has the lowest fixed broadband basket price (at least 5 GB) at $4.5 per month, while India at $5.0 per month offers unlimited data. India has the lowest price for mobile telecom, at $2.0, among peers such as China ($6.2), Thailand ($10.7), and Vietnam ($2.3), indicating headroom for improvement in ARPU in India in line with growth in per capita income.  

• Even after the telecom companies’ recent hike in their pricing plans, India remains the cheapest internet provider compared to other economies. These hikes will gradually increase the ARPU, which is a positive factor for the telecom companies. In the last fiscal, the ARPU was at INR 182 with a lot of headroom for growth in the long run. 

Government Initiatives:  

• PLI Scheme: The INR 12,195 crore PLI scheme is supporting the telecom industry now for manufacturing of telecom and networking products.  

• Telecom Sector Reforms: The government approved structural and procedural reforms in the telecom sector on September 15, 2021. Permission for 100% foreign direct investment (FDI) in the telecom sector under automatic route, subject to safeguards. Earlier it was 49%; later it revised to 100%.  

• BharatNet Project: It is one of the biggest rural telecom projects in the world, implemented in a phased manner to all Gram Panchayats (approximately 2.5 lakh) in the country for providing non-discriminatory access to broadband connectivity to all the telecom service providers. Objective is to enable access providers like mobile operators, Internet Service Providers (ISPs), cable TV operators, and content providers to launch various services such as applications like e-health, e-education, and e-governance in rural and remote India.  

• Infrastructure development: The government allocates INR 14,200 crore for telecom infrastructure rollout in 2021-22, which entails completion of an optical fiber cable-based network for defense services, rolling out broadband in 2.2 lakh panchayats, and improving mobile services in the Northeast. 

• The government had approved INR 24,664 crore for an advanced communications network for defense services in lieu of their vacating spectrum for mobile telephony in May 2018. The project was to be completed within 24 months. There is not much data available on whether this project was completed apart from the order given to HFCL. 

ESG:  

Environmental:  

Telecom networks consume large amounts of electricity, often generated from fossil fuels, leading to significant carbon emissions and contributing to global warming. The industry also generates substantial e-waste, including old phones and equipment, which can release toxic substances like lead and mercury into the environment if not properly disposed. Additionally, the increase in cell towers and wireless devices raises concerns about the long-term environmental impact of electromagnetic fields (EMFs), especially on wildlife. While telecom companies are adopting green initiatives, such as renewable energy use and e-waste recycling, the industry’s environmental footprint remains a concern.  

• Over 75% of the VIL BTS portfolio is outdoor BTS (20% reduction in energy consumption compared to indoor BTS);  

• The diesel elimination project initiated by VIL to reduce carbon footprints currently covers over 11,700 sites.  

• According to a press release by Vodafone Idea about Green Planet. They mentioned that 100% of the telecom hardware procured by the company is low-power-consuming telecom hardware.  

Social:  

VI Foundation has launched a program with vodafone Idea to raise awareness among students about the various scholarships available to them.  

• Post-matriculation scholarships  

• Scholarships for college  

• Scholarships for undergraduate students  

• Scholarships for postgraduate students  

• Vodafone scholarships  

• Best minority scholarships  

• Merit-based scholarships  

Governance:  

1. Data Breach Allegations: In August 2022, CyberX9, a cybersecurity firm, reported that Vodafone Idea’s system had multiple vulnerabilities that allegedly exposed the personal data of its customers, including call logs of nearly 301 million people, among them 20.6 million postpaid users, over a span of two years. However, Vodafone Idea has denied these claims. 

CyberX9 has urged the government to order an independent and fair security audit of Vodafone Idea, stating that the company has potentially exposed millions of customers’ call logs and other sensitive data for at least the past two years. The firm also alleged that during this period, multiple criminal hackers may have stolen this data. 

2. On May 17, 2023, Vodafone Idea, was ordered to pay a penalty of INR 20,00,000 under section 43A of IT Act, 2000. This is because there has been a surge of cases where duplicate SIM cards have been issued by the telecom service provider without due verification, often leading to unauthorized financial transactions. In this case, the complainant’s SIM card services were stopped, and a duplicate SIM card was issued to a fraudulent person, leading to a loss of ₹20,00,000. 

Conclusion:  

Vodafone Idea has been struggling with tough competition, debt, and unpaid dues. This business requires consistent capital. With an increase in customer base, along with growing ARPU, it may bring financial stability. But if the company fails to attain enough market share, the future remains unprecedented and risky. We recommend that investors remain cautious with their investment decisions in this company.  

Savart is a SEBI-registered investment advisor. The purpose of this content is to educate, not advise or recommend any particular security. Please remember that investments are subject to market risks. Please conduct thorough due diligence or seek professional guidance before making any investment. Do not believe in any speculations.