Vodafone: Out of Ideas

Background

This is the story of Vodafone Idea, a David who could not beat Goliath. Vodafone India was a subsidiary of the UK-based Vodafone Group PLC, set up to bridge the gap between its customers and a better future by providing them with better digital services. In August 2018, it merged with another leading company in the telecom industry, i.e., Idea Cellular and rebranded itself as Vodafone Idea.

Things started to fall apart for the company from the day Jio was born. In April 2015, Vodafone Idea had a market capitalisation of Rs. 729.2 bn, touching a low of Rs. 84.8 bn in November 2019, the current market capitalisation of the consolidated company stands at around Rs. 272.34 bn.

But how did a lucrative company which was once worth billions of dollars fell from grace and is now being traded for Rs 9.05 per share?

The crisis

It was not one, not two but many crises that had a domino effect on Vodafone’s troubles. Following are the two major reasons that plagued the company.

There’s a new sheriff in town

Amidst the notable recognition of Vodafone India and Idea Cellular, these companies were inflicted with a serious crisis when a fresh competitor, Jio protruded above the veteran companies in September 2016. As a new force of wave surged over the market, the organisation, which was formerly two different entities viz., Idea Cellular and Vodafone India were merged as one to counteract the competition brought by their new rival.

During its initial stage, Vodafone Idea was trading at the price band of Rs.50 - Rs.70. However, it didn’t take long for its stock price to fall to Rs. 10 the following year and subsequently, hit rock bottom when it traded as low as Rs 3.40.

Although the merger awarded them with a comparative advantage of 38 per cent share in the total subscribers, the new prodigy would soon seize their market. Jio accumulated 35 per cent of the market share followed by Bharti Airtel with 29 per cent and left VI with 25 per cent. As a result, the company lost over 130 million subscribers and this was concurrent with the introduction of the 4G spectrum that provides fast connectivity.

The notorious degree of competition and paper-thin profit margin wasn't kind to VI as well. While its competitors, Jio and Airtel, enjoyed a higher Average Revenue Per User (ARUP) of Rs. 124 and Rs 129, respectively, Vodafone struggled to stay afloat due to an ARUP of Rs. 108 per user only.

The debt balloons

Vodafone's tussle began way back in 2008 when they executed a deal overseas to acquire a controlling stake in Hutchison Essar at $11.2 billion. This led to a series of severe consequences. The tax department stated that the company should've withheld tax and issued a notice seeking Rs 11,281 crores later augmented to Rs 7,900 crore.

Experts believe that this judgement had sealed the fate of Vodafone. The judgement brought about an unfathomable series of events that would drastically derange the company from its real potential. As a result, VI owes the government more than Rs 1.68 lakh crore as cumulative fees for AGR and spectrum and another Rs 23,400 crore as international debt by April 2023. As of March 31, 2022, the company was debt-ridden with total debts amounting to Rs 1,97,878.2 crores.

Future

It has been a spiral of unending problems for Vodafone Idea. The woes of the company multiplied when the Birla Group abandoned the company and sold its shareholding to the government on August 6, 2021. This further blemishes the faith in the company's future. The company has fallen into a cyclical nature of unending burnout of cash reserves and Rs 8,160 crore payment due over 12 months.

Meanwhile, many analysts believed that only the government can revive the dying company by bailing out the company and revamping the AGR systems to relieve the weight of the company. So, it will be a test of time and the rules and regulations imposed by the policymakers whether Vodafone Idea will avert bankruptcy and find solutions to the problem to present a long-term plan for its shareholders. Another question to ponder is if the government of India will allow the Indian telecom market to transfer into a duopoly.