Brickwork Ratings downgrades Vodafone Idea over subscriber loss

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Brickwork Ratings has downgraded the credit rating of India’s largest telecom operator by subscribers, Vodafone Idea, due to the sharp shrinkage seen in the company’s user base in the last six months.

The company’s subscriber base has fallen by a whopping 21% between September last year and March this year, going from 42.23 cr (422 mln) to 33.41 cr — a loss of 88 million subscribers in six months.

The hemorrhaging is yet to stop — even as it has slowed. Another 1.6 million users left Vodafone Idea in April, the latest month for which the telecom regulator has numbers for. During the same month, Reliance Jio — the company’s nemesis — added more than 8 million new users.

The churn is not completely unexpected, and was initiated by Vodafone Idea itself. The company has been keen to get rid of ‘dead weight’ customers who do not contribute to its revenue, but drag down ARPU numbers.

A large chunk of mobile users in India use two SIM cards on their phones, choosing the cheaper one to make outgoing calls and subscribe to data.

Like competitor Bharti Airtel, Vodafone Idea too had expected that it would be able to reconvert these dormant customers into paying subscribers as soon as Reliance Jio started raising prices.

However, with Jio in no mood to raise prices, both Vodafone Idea and Bharti Airtel seem to have decided to bid their ‘incoming-only’ subscribers adieu. They have achieved this by turning off incoming call facility for users who do not spend at least Rs 35 per month.

The purge is likely to have already made Reliance Jio India’s No.1 telecom operator by number of subscribers this month.

Analysts have largely been supportive of the Vodafone Idea’s decision to kick out non-spenders.

However, Brickworks — which cut the company’s credit rating by one notch today — seemed to be disappointed with the company’s inability to hold on to, and convert, its dormant customers into active ones.

“The rating revision is on account of deterioration in the company’s subscriber base and market share, significant net losses along with a cash loss in FY19 and considerable repayment obligations (including deferred spectrum payments) falling due over the medium term…

“The outlook for Vodafone Idea Ltd has been kept as Negative as BWR believes that no significant improvement is likely to happen in the company’s business risk profile over the medium term. The rating outlook may be revised to ‘Stable’ in case the company is able to sustain its subscriber base and market leader position with an improvement in the profitability indicators,” it added.

Even as revenue remains stagnant, the agency took note of the successful efforts undertaken by the company to cut costs by merging the operations of Idea and Vodafone.

“Despite a fall in the subscriber base, the gross revenue of the merged entity remained flat at Rs. 11775 Crs during Q4 FY19 as compared to Rs. 11764.80 Crs in Q3 FY19. With the integration of more than 10 circles and realization of operational synergies to that extent, Opex (operating expenses) came down by Rs. 638.20 Crs during the quarter. Accordingly, EBITDA Margin improved from 9.70% in Q3 FY19 to 15.20% in Q4 FY19.”

It said the recent investment of Rs 25,000 cr by the company’s shareholders has ensured that the company has enough funds for the next 1.5 to 2 years.

Brickworks pointed out that at one point, the company’s cash levels had come down to Rs. 7,552 cr, in March.

“Post the rights issue, the cash balance has improved to Rs. 23,445 Crs as on May 31, 2019. In addition to this, VIL is likely to receive around Rs. 6000 cr from the sale of stake in Indus Towers Ltd during second half of FY20 and is also planning to monetize its 1,58,000 km of intracity and intercity fibre network.”

In comparison, the company’s will require about Rs 10,000 cr to service its debt obligations in the current year, excluding interest, and has plans to invest Rs 17,000 cr in its network during the year, said Brickworks Ratings, which is promoted by Canara Bank.

“While, the current liquidity is sufficient to manage VIL’s debt and capital commitments for the near term, it may have to go for another round of fundraising to manage its requirements in the long term,” it said.

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