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Merger with BSNL may save Vodafone Idea from going bankrupt: Deutsche Bank

By Saima Siddiqui 
Updated Date

Kolkata: The government must back state control of Vodafone Idea (Vi) by quickly merging it with Bharat Sanchar Nigam (BSNL) and recapitalise the cash-strapped telecom operator to save it from going bankrupt, especially after the Supreme Court ruled out any relief on its huge adjusted gross revenue (AGR) dues, brokerage Deutsche Bank said.

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“…the only viable solution is for the government to recapitalise Vi by converting its debt into equity, preferably while merging it with BSNL, and then providing it a clear commercial mandate based on profitability targets and incentives,” Deutsche Bank said in a note.

It added that “should this happen, Vi’s shareholders would be heavily diluted as government debt is roughly six times the (telco’s) current market-cap, and such a solution might be an acceptable outcome to shareholders, with a $20 billion enterprise value feasible and non-dilutive”.

According to the latest borrowing numbers of the ailing telco, while there are several other lenders that have a higher exposure to the company in absolute amounts, Yes and IDFC First top in terms of percentage of their loan books at 2.44% and 2.9%, respectively.

This makes the exposure to Vodafone very critical for the health of their balance sheets. State Bank of India has the highest exposure to VIL at around ₹11,000 crore, but this is less than 0.5% of the state-owned bank’s loan book.

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At present, Vi owes the Department of Telecommunications more than Rs 1.5 lakh-crore by way of AGR and deferred spectrum payment dues. And as co-promoters, UK’s Vodafone Group Plc and the Aditya Birla Group of India own 44.39% and 27.66%, respectively in Vi. It is saddled with a net debt of Rs 1.8 lakh-crore and had a cash balance of Rs 350 crore in the quarter ended March 2021. 

The need to raise funds has become more important and urgent for VIL after the Supreme Court rejected its appeal to allow the payment of self-assessed adjusted gross revenue (AGR) dues. VIL’s stock hit the lower circuit twice on Friday after the verdict. The telco needs to raise capital to deal with liabilities of ₹1.8 trillion. The government has demanded ₹58,254 crore as AGR dues from VIL, while the company has self-assessed this at ₹21,533 crore. Vodafone has so far paid ₹7,854 crore.

For Yes Bank, especially, any deterioration in the VIL account will have a significant impact on its already large non-performing assets (NPA) position. Though the bank reported a return to profit in Q1FY22, it had gross NPAs of 15.6% (absolute amount of ₹28,500 crore, down ₹100 crore quarter-on-quarter) in Q1, with corporate NPAs at 27%, retail up 40bps to 3.3%, SME up 20bps to 3.9% and mid-corporates at 2.8%.

“While the slippage ratio fell sharply from 7.6% to 5%, it still remains high. Incremental stress, including slippage plus restructuring, remained high at 7% of loans, though materially lower than 8.3% q-o-q. Reductions to NPLs were marginally higher than slippage leading to a marginal reduction in GNPLs. Gross non-performing exposure stood at a high 20% of loans including GNPLs of 15.6%. Standard stress loans remained high at 9% vs 8% q-o-q. Total stress loans remained high at 29%, among the highest in the sector. PCR (provision coverage ratio) on non-performing exposures stood at 67% while PCR on standard stress remained low at 5%,” noted brokerage Elara Capital in a 23 July report.

On the other hand, while IDFC First Bank has the highest exposure to VIL as a percentage of its loan book, the lender had said in February 2020 that it had created a 50% provision for this account. To be sure, while the bank reported stable asset quality at the end of Q4FY21 with gross NPA at 4.15% compared with 4.18% in Q3, brokerage ICICI Direct noted that though the lender’s PCR improved to 56.2% from 52.3% q-o-q, it is still on the lower side. “Also, with the pandemic forcing lockdowns again, we may see elevated provisions, going ahead, in order to deal with incremental stress and strengthening of the balance sheet,” it said.

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The evolving Vodafone situation also comes at a time when IDFC Ltd has received RBI’s approval to exit as the promoter of IDFC First Bank since its five-year lock-in period has expired. This could pave the way for a potential reverse merger between IDFC Ltd and IDFC First Bank Ltd, Mint reported on 22 July.

“The Vodafone situation will be an overhang and a key thing to monitor for banks with high exposure to the telco, at a time when the second wave has impacted asset quality, especially in retail loans,” said a banking analyst at a domestic brokerage, who spoke on the condition of anonymity.

Emails to IDFC First and Yes Bank did not elicit a response till press time.

Meanwhile, analysts said Vi would require several things to fall in place to continue operating as a going concern, including a further moratorium from the government on spectrum payments, a coordinated tariff hike in the industry supported by floor pricing and a material reduction in licence fees and spectrum usage charges (SUC) to improve operating economics of the telecom sector. 

Deutsche Bank added that despite all “talk” of the Indian government wanting three private players, “there has been insufficient action to take that claim very seriously”.

India’s long history of extracting as much as possible from the (telecom) sector, it said, had “left a legacy of repeated business failures, including the largest bankruptcy in Indian corporate history, Reliance Communications, and this is likely to be trumped by Vi”.

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Deutsche Bank said the ball is in the government’s hands.

“It needs to make a call, (either) state control of Vi or duopoly, as the alternative appears to be bankruptcy, as private investors are extremely unlikely to save the company”.

Last Friday, a three-judge Supreme Court bench headed by Justice LN Rao junked the petitions filed by Vi, Bharti Airtel and Tata Teleservices seeking a recalculation of their AGR dues, calling them “misconceived”.

Vi is hit the hardest by the verdict as its total AGR dues are now confirmed at Rs 58,254 crore, of which it has paid only Rs 7,854 crore.

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