Vodafone India bulls get ahead of themselves

New Delhi’s bailout last year of Vodafone Idea IDEA is starting to pay off. This week its major shareholder, the UK's Vodafone VOD, bagged just shy of $2 billion selling most of its 21% stake in communications infrastructure provider Indus Towers INDUSTOWER, which counts India’s third-largest telecom operator as a major tenant. That comes two months after Vodafone Idea managed to raise more than $2 billion in the country’s largest-ever secondary share sale. But it remains so weighed down by three major problems that the almost threefold increase in its stock price since the government stepped in looks overdone.

First, Vodafone Idea is losing customers. At 213 million, its user base is 48% below its peak of 408 million at the time Vodafone India merged with Idea Cellular in 2018. The pace of erosion did at least slow in the financial year to the end of March. But it’s hard to imagine the trend reversing until the company can offer the same 5G service already offered by larger rivals Reliance Industries RELIANCE1! and Bharti Airtel AIRTELPP.E1; in fact, in some areas Vodafone Idea only operates 3G networks.

Fixing that will take time – and money. Sure, the firm run by Akshaya Moondra has added to its coffers and may soon be able to tap lenders for up to $4 billion-having cut its bank debt by 64% in the 12 months to the end of March. But it still owes the government a chunky $24 billion. Moreover, analysts expect the company to keep losing money for the next three financial years, per LSEG data.

On top of that, Vodafone Idea has a messy ownership structure. Tycoon Kumar Mangalam Birla’s group is now regarded as the effective proprietor, but holds just 8%. New Delhi’s intervention last year gave it a third of the company, though after April’s equity offering that has dropped to 24% and it’s not expected to be a long-term holding. Neither is the UK’s Vodafone. It remains the biggest shareholder with 29%, but is unlikely to inject any more cash into the business. That means shares in more than half of the company are likely at some point to need to change hands.

New Delhi's rescue has helped stop the rot. But the prospect of Vodafone Idea suffering from some dropped calls remains pretty high.

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CONTEXT NEWS

Vodafone Group sold a bigger-than-planned 18% stake in India's Indus Towers on June 19, raising $1.82 billion that the British telecom group said it will use to reduce debt.

The company, which owned 21.5% of Indus prior to the sale, had initially planned to sell a 10% stake but strong investor demand made it nearly double the sale size, Reuters reported the same day, citing an unnamed banking source.

In April, Vodafone Idea raised $2.15 billion through the country’s largest ever follow-on public offer, garnering bids worth seven times the issue size.