Vodafone Idea Rescue 2.0: Government Steps In Again, Will It Be Sufficient?

Vodafone Idea Ltd. has got a second wind in its sails. The government's decision to convert Rs 36,950 crore of spectrum liabilities may provide a breather for another 18–24 months to the troubled telecom services provider, but it may not be sufficient.

The recent conversion of spectrum liability to equity takes the government stake in Vodafone Idea close to 49%, with the promoter stake falling to just above 25%. The last time such a conversion was carried out in February 2023. The government seems to have converted to the extent that it does not get majority control, while the current promoters retain above 25.5% and minority shareholders maintain a minimum public shareholding of 25.4%.

Government has priced the Vodafone Idea shares at a face value of Rs 10 apiece while converting the spectrum dues, which is at a significant premium to the current market price of around Rs 7.48 apiece. The company disclosed that the pricing of shares to be allotted within 30 days was arrived at on the basis of the higher limit of the volume-weighted price of equity shares during the last 90 trading days preceding the relevant date or 10 days preceding the relevant date.

Despite the second lifeline, Vodafone will continue to have nearly Rs 20,500 crore of spectrum dues. Though this will open cash flows of close to Rs 40,000 crore over the next few years, it will be insufficient to make future spectrum payments, raising the question of whether there will be a 'Third Rescue'.

Vodafone had Rs 1,57,000 crore in spectrum dues, Rs 70,300 crore in AGR dues, bank debt of Rs 2,300 crore, and cash of Rs 12,100 crore at the end of December 2025. Post conversion, the net debt will reduce to around Rs 1.8 lakh crore.

The moratorium period for the spectrum payment obligations related to spectrum auctions conducted till 2016 ends between October 2025 and September 2026, while the moratorium period for AGR dues ends in March 2026. The second conversion will fully cover the spectrum dues for the fiscal ending March 2026 and partially cover the spectrum dues for the next fiscal, giving Vodafone 12 months to shore up its cash flows and alternate sourcing of funds.

The two conversions of spectrum dues are in line with the government's intent to ensure a ‘3+1’ player market in telecom. How long the government will hold on to this intent is a big question, because Vodafone and the Aditya Birla Group haven't committed additional funds, unlike the first round of conversion when they infused funds.

Vodafone Idea will, in all probability, require raising equity in the next few years to ensure its viability while it raises bank debt worth Rs 25,000 crore. The equity requirement is accentuated by the depleting net worth of the company and future spectrum payments. It is unclear whether this equity raise will be from the promoters or external investors.

A year back, Vodafone Idea raised Rs 18,000 crore equity via offer-for-sale at a price band of Rs 10–11 per share. It was to use Rs 12,750 crore for network expansion, Rs 5,750 crore for 5G spectrum that it wanted to add, and Rs 2,175.3 crore for repayment of spectrum dues. This was accompanied by equity infusion by the Aditya Birla group and subsequently Vodafone Plc.

Despite the second rescue, the balance sheet of the third-largest telecom company is dependent on two key factors — improved cash flows and further equity infusion.

It needs to increase the average revenue per user from Rs 163 at the end of December to over Rs 380 in the next two-three years. That's more than twice the current tariff, i.e., a more than 35% increase in tariff every year for the next three years. Further, it will need to fund capex of Rs 10,000 crore to Rs 15,000 crore every year through internal accrual of cash or equity raise. Currently, the expected free cash flow may not be sufficient to fund this capex requirement and meet future spectrum payments.

Vodafone Idea is required to invest close to Rs 50,000–55,000 crore in capex over the next three-five years to maintain its subscriber market share. Vodafone Idea suffered significant subscriber loss after it was not able to scale up 5G and tariff hikes which were more than competition.

The key to survival is cash flows, and that is entirely dependent on tariff hikes. But will competition play along?