Vodafone Idea FPO, future funding plans to ensure India remains strong three-private telco market: Analysts

Vodafone Idea’s follow-on public offer (FPO) was subscribed 6.36 times by April 22, the final day of bidding, with investors bidding for 8,011.8 crore equity shares.

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Vodafone Idea’s fully subscribed Rs 18,000 crore follow-on public offer (FPO) and other fund-raising plans will give the telecom operator enough firepower to compete with Reliance Jio and Bharti Airtel and ensure that India remains a three-private telco market, a number of analysts said.

They added that the telco’s focus on its planned capex for 4G expansion and 5G rollout will help it arrest subscriber churn and ring-fence premium, high-paying customers in priority markets.

Analysts also believe that Vodafone Idea may even benefit from being a late entrant in the 5G market, learning from its bigger rivals that have already rolled out pan-India 5G networks.

“The fundraise via FPO, along with other fundraising plans in the pipeline, will give Vi enough firepower to compete with Jio and Airtel in the short to medium term. Thus, this will allow the Indian mobile market to continue being a 3-player market, which is quite critical from a consumer perspective to ensure competitive pricing as well as to continue incentivising telcos to innovate their service,” Ashwinder Sethi, a principal at consulting and analyst firm Analysys Mason told Moneycontrol.

Vodafone Idea’s follow-on public offer (FPO) was subscribed 6.36 times by April 22, the final day of bidding, with investors bidding for 8,011.8 crore equity shares. The country's third-largest telecom operator has offered 1,260 crore shares in the Rs 18,000-crore FPO, the largest such offering in the country. This move is part of a larger strategy to gather Rs 45,000 crore through a combination of debt and equity.

Mahesh Uppal, founder of ComFirst Consulting, said maintaining a competitive market is “undeniably” important. The government has also repeatedly expressed its stance against a duopoly or concentrated market.

“No government would like the narrative and optics of a company as large and high-profile as VIL crashing, whose subscriber base is over twice that of BSNL and has roughly 22 crore subscribers. VIL is here to stay,” Uppal said.

In a note, Ambit Capital said that the FPO, a part of the debt-laden telecom operator's broader plan to raise Rs 45,000 crore through debt and equity, may help it challenge the current near-duopoly in the sector.

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Ambit Capital added that if Vodafone Idea uses the funds effectively to enhance its competitiveness, it could increase its share price and cash flow generation. "With improved financial health, Vodafone Idea may have the option to either pay off its spectrum and AGR dues or negotiate with the government to convert unpaid dues into equity at prevailing share prices. This strategic decision would depend on VI's assessment of its financial strength and the most beneficial approach for its long-term sustainability.”

Analysts at Kotak Institutional Equities also predict Vodafone Idea's fundraising may boost its short-term prospects. However, they don't see any significant gain in market share or relief from potential large equity dilution.

They warn that the Government of India's stake could surpass 80 percent, limiting the potential gains for minority investors.

The Department of Telecommunications (DoT) also believes the country’s telecom market structure is in good shape, with Vodafone Idea firming up plans to expand its 4G and 5G networks. “The structure of the market looks good,” Neeraj Mittal, DoT secretary, told Moneycontrol in an interaction on April 19.

Vodafone Idea's Chief Executive Akshaya Moondra, on April 17, told Moneycontrol that the telco’s focus is to expand its 4G coverage to match the competition. “We believe we have been a very competitive player in the past. With investments coming in, there is no reason why we will not be competitive going forward and participate in the growth story,” Moondra said, adding that 4G expansion is the telco’s topmost priority.

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Moondra said the plan was to provide good quality 4G coverage to arrest subscriber churn. He claimed that 5G was not the reason behind the net loss of subscribers. “The lack of 4G coverage, which is significant, is the reason for the loss of subscribers.”

Of the total FPO proceeds, Vodafone Idea has proposed using Rs 12,750 crore to purchase equipment for expanding its network infrastructure by setting up new 4G sites, expanding the capacity of existing 4G sites, and creating new 5G sites. As per the RHP, it will spend Rs 5,720 crore of the Rs 12,750 crore earmarked for network expansion on setting up its 5G network.

“Vi may want to focus the network investments on a subset of circles where they are performing well (Revenue Market Share greater than 15 or 20%) as well as focus first on retaining premium, high-ARPU customers,” Sethi said.