Potential equity dilution in Vodafone Idea may keep investors at bay

Vodafone Idea indicated last week that fundraising discussions have picked up pace, but analysts believe that funds will largely come as debt and not equity owing to apprehension among investors with regard to potential equity dilution after the moratorium on regulatory dues end for the company.

Simply put, analysts are factoring in possibilities of further dues conversion into equity by the government in Vodafone Idea and limited possibility of value addition with short-term funds. In case new investors enter the company at this point, there is a possibility that they might see equity dilution if the company issues fresh equity shares to the government in the future.

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The telecom operator is presently banking on the government’s moratorium on past adjusted gross revenue (AGR) and spectrum-related dues.

However, once the moratorium ends in September 2025, the company’s annual instalments for spectrum and AGR dues would come around Rs 43,000 crore. Based on the company’s cash Ebitda of around Rs 10,000 crore, Vodafone Idea is expected to have a gap of Rs 30,000 crore, according to analysts.

“Vi has large dues outstanding to the government, which could lead to a very significant equity dilution down the road (33% dilution for just Rs 16,100 crore) equity conversion recently).

Potential large equity dilution (after moratorium in second half of FY26) could limit Vi’s ability to attract equity investors, in our view,” brokerage house Kotak Institutional Equities said in its report.

“We do not see a credible case for Vi’s revival yet,” the report said.

According to brokerage house JP Morgan, Vodafone Idea will be a going concern and in the long term, a part of outstanding debt on spectrum and AGR will also be equitised by the government.

At the end of the January-March quarter, Vodafone Idea’s gross debt (excluding lease liabilities and including interest accrued but not dues) fell to Rs 2.09 trillion. The gross debt comprises deferred spectrum payment obligations of Rs 1.31 trillion, AGR liabilities of Rs 65,550 crore due to the government, and debt from banks and financial institutions of Rs 11,390 crore.

“As per our analysis, the subsistence of Vodafone Idea post FY26 will become increasingly difficult, as the company may face funding shortfall of Rs 25,000 crore in FY26 and of Rs 36,000 crore in FY27 that will require steep tariff hikes of 85% and 122%, respectively, for making payments,” brokerage house Emkay Global said.

“Further conversion of installments into equity (Rs 17,400 crore per annum) will offer little relief to Vodafone Idea. Moreover, this will result in cumulative dilution of 63% to 77% in 5 years (FY26-30) for shareholders, assuming conversion rate of Rs 10 to Rs 5,” the brokerage added.

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Amid reason behind analysts concern for equity dilution is the continuous loss of market share of Vodafone Idea in absence of any meaningful investment in 4G expansion as well as launch of 5G.

At a time when Bharti Airtel’s capex was at Rs 20,600 crore for wireless segment in FY23, Vodafone Idea’s capex was at Rs 3,360 crore. Even for Jio, the annual capex has been around Rs 25,000 crore.

“Jio has now started targeting postpaid users via cheaper plans, which, for Vodafone Idea, have been largely sticky and its only saving grace. Given a fragile balance sheet, continuing loss in subscribers and limited visibility on tariff hikes, Vodafone Idea needs immediate funding to incur 5G capex and upgrade its network,” said brokerage house Nuvama Institutional Equities.

In FY24, Vodafone Idea needs to service a debt of Rs 8,000 crore.

In the January-March quarter, the company’s net loss was at Rs 6,419 crore, lower than Rs 7,990 crore in the preceding quarter. The loss was narrowed owing to fall in network expenses, finance cost, depreciation, among others. Vodafone Idea’s revenue from operations fell 1% q-o-q to Rs 10,506.5 crore.

The company lost 2.7 million mobile subscribers, taking its subscriber base to 225.9 million at the end of March.

Once the funding in place, the company will use the funds to invest in current 4G network expansion as well as 5G rollout to arrest its subscriber churn.