After Supreme Court’s (SC) rap yesterday, Vodafone Idea’s speculated collapse is trending everywhere.
This is due to the poor financial position of the Company coupled with Promoters’ (Vodafone and Birla) comments in the past that they may decide to close down if the AGR relief is not granted.
Personally, however, I still believe that the Company would survive. Reasons –
- It still controls almost 1/3rd of the Indian telecom subscribers. This is very significant and valuable. Replacement costs for the same is in lakhs of crores (we all know how much Jio spent to acquire similar number of subscribers).
- One can assume it’s current subscriber base to be mostly loyal. Over the last few years there has been a significant churn and many subscribers shifted initially to Jio and recently also to Airtel. What remains now are mostly those who have consciously decided to stay back for varied reasons. This provides a good visibility on future revenues of the Company.
- At operational level, the Company continues to make profits. In the recently announced results for December 2019 quarter, it reported an EBITDA of Rs 3,420 crore. This is significant –
- Telecom revenues being recurring provide good predictability
- Stabilised customer base further adds to the predictability and hence its attractiveness
- Recently, all the telecom companies have started increasing the prices and hence one can expect further additions to the profits. In general, telecom business operates at low variable costs.
- Company’s total debt + AGR is around 1.75 lakh crore. It looks huge but may look more viable when looked in the context of underlying business dynamics, profitability, predictability, potential and the replacement costs. In a worse case scenario, I am sure this can be negotiated down or at least restructured for future payouts.
- Three large players is the minimum that any industry should have and hence Government may not want to let it collapse. Besides, it’s collapse has significant implications for the banking sector that is again not in the economic interests.
If for any reasons, existing owners don’t continue, I expect it of good interest to many suitors with deep pockets – both domestic and international, strategic or financial. Telecom is key to the new world and Vodafone Idea provides a quick entry with a significant customer base !
Disclaimer: The above are my personal views and not any investment recommendation to the reader.