VI: Saving Vi will be a tightrope walk for lenders. But they may not go out of their way to rescue it. – The Economic Times

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SynopsisVi has a mammoth debt of INR1.8 trillion. And this has been haunting its parent companies. Its sustainability is also under question. To service debt, Vi should either get help from promoters or lenders. Banks, on the other hand, have just crawled out of a bad loan mess. Do banks have it in them to absorb another shock?

Not so long ago, both Vodafone and Idea came together singing, ‘ring-a-ring-a-rosies’. And then it became Vi and it had its ‘pocket full of posies’ for a very short time. Then the market forces came down ‘A-tishoo A-tishoo’ and now it is close to ‘falling down’.

At least, it seems so if we go by the developments in the past few years.

If you stroll a little back in memory, Idea Cellular was once considered a value stock by fund managers and foreign investors.

But things changed, and by 2016 it started losing that tag slowly and the inevitable merger with Vodafone-India happened.

Vodafone Idea’s stock was always only a momentum pick for the Street. The momentum fizzled out by 2019, thanks to the adverse order from India’s apex court.

That gave birth to Vi, which subsequently became punters’ pick. Now, it’s on its way to becoming a penny stock. What led to this is pretty well-established.

In fact, back in September 2019, we told you that a merger without a plan wasn’t a good Idea for Vodafone. Again, in February 2020 we pondered on this question — Is Vodafone Idea too big to fail?

Eighteen months down the line, we have both promoters throwing in the towel.

Yesterday, the government scrapped the retrospective taxation law and made the changes in the Income Tax Act. As per the new rules, any demands from the government related to such retrospective tax stand nullified and any amount that has already been paid will be refunded without interest.

“We aren’t sure how well the amendment on retrospective taxes will play out for Vi. Vi and Vodafone Plc are two different entities and this decision by itself doesn’t make a base case for Vodafone Plc to infuse capital in Vi. For banks, it doesn’t alleviate our concerns. The sword remains hanging,” says the CEO of a private bank.

While this only impacts Vodafone Group Plc and not Vi, it will be interesting to see if there is a change in strategy towards its India business by Vodafone Group. We will keep a track of this new development and if at all it will impact Vi’s current situation.

Promoters need to walk the talk
After months of ducking the question on capital infusion into Vi, Aditya Birla Group and Vodafone Plc are willing to let go of their stakes for just INR1 to the government.

The last time when India Inc had a similar predicament was in 2017, when Tata Power was willing to cede its 51% control in its flagship Coastal Gujarat Power Limited project, popularly known as Mundra plant, to the state government for INR1.

“Normally, a large account like this and that too belonging to a marquee promoter group, we wouldn’t hesitate to restructure the exposure. But here the situation is different.”

— The CEO of a private bankTatas managed to pull a rabbit out of the hat. The debt is being taken care of and Mundra plant is no more a threat for banks.

With Vi, however, that may not be the case.

“As late as in January when the bankers consortium met representatives from Vi, Vodafone Plc and Aditya Birla Group, there was a certain willingness to infuse money and we had hopes. There was a bit of a ‘who’ll open purse first’ kind of situation but we were willing to restructure the loan if we saw money on the table,” says a senior executive of a public sector bank (PSB).

Now, with no commitment on fresh equity infusion from both, the official says no amount of restructuring will be of any avail.

Does this mean a collapse of Vodafone-Idea is on the cards? Will the lenders rush to tag it as a non-performing asset (NPA) and take the legal route for a resolution?

It won’t be an easy call to take. Here’s why.

Banks are back to square one
Vi’s debt and liabilities are mountainous at INR1.8 trillion. Out of this, over INR96,000 crore is for deferred spectrum payment obligations, over INR28,000 crore is debt from banks, and over INR58,000 crore is for adjusted gross revenue or AGR-related statutory dues of which Vi has already paid INR7,854 crore. And this has been haunting the company, questioning its sustainability for quite some time.

On the other hand, Indian banks have just crawled out of their bad loan mess which began in 2015. After five years of stringent firefighting, do they have it in them to absorb another shock?

Bank exposure to Vi@2x

“Normally, a large account like this, and that too belonging to a marquee promoter group, we wouldn’t hesitate to restructure the exposure. But here, the situation is different,” says the CEO of another private bank.

In June quarter of FY22, IndusInd Bank took some provisioning towards its exposure to Vi. Way back in FY20, as a measure of prudence IDFC First Bank provided for 50% of its exposure to the telco, only to reverse some part of it a year later, citing reasons of better operational visibility. Now, the bank holds over INR450 crore of provisioning.

Even in January 2021, promoters of Vi had the willingness to salvage the business. “Things took a sudden turn, and we are also equally caught unaware. We didn’t see it coming so fast,” says the banker quoted above.

Will restructuring help? In this case, it may not be an easy option.

For one, Vi’s is a unique instance where the non-fund (or off-balance sheet) exposure of banks is much larger than the funded exposure. Usually extended by way of guarantees and letters of credit, any devolvement or failure on Vi’s part to honour the guarantee will be a huge burden on banks. In such a case, it will no more be an off-balance sheet item.

Also, with the pool of available cash and assets shrinking for Vi, banks may have very little operational comfort to restructure the existing liabilities of the telco.

Lately, banks are unwilling to budge on stressed assets unless the promoter(s) hands out personal guarantees. Most recent example being Shapoorji Pallonji’s INR11,000 crore restructuring in September 2020.

Will Aditya Birla Group and Vodafone Plc be ready to offer something of this nature to banks is highly doubtful at the current juncture.

“For now, such conversations are not even on the table and the telecom operator is a standard asset,” Dinesh Khara, chairman, State Bank of India, said in a media conference on August 4, 2021.

In fact, there is a larger implication for the banking system. What will happen to bank loans of Aditya Birla Group companies if Vi goes south?

A group problem
The total indebtedness of Aditya Birla Group to banks is at INR194,091 crore, according to data from Capitaline.

Aditya Birla Group indebtedness@2x

As a principle of prudence, if there is an account within the group which turns into an NPA, banks start providing for loans of other companies within the group. This is primarily because of a possible rating downgrade for the group companies when one company is at default.

While the extent of provisioning need not be as per the norms laid down by the Reserve Bank of India (RBI), this has become the accepted practice for banks lately. The RBI also insists on this, so that banks are prepared for any eventuality. It’s only in FY21 that PSBs started returning good profits. Any incremental provisioning cost could set the clock backwards, and even for private players who have just healed from their asset quality problems.

Asset quality issues caused by retail portfolios is another big unknown for the sector. Under such circumstances, the preparedness of banks to take another mammoth hit on their profit and loss statement will be tested in FY22.

For now, bankers who have long been associated with Kumar Mangalam Birla say efforts are towards ring-fencing his ‘healthy’ companies. His decision on Wednesday to step down as the non-executive chairman of Vi and also cede his directorship in the company gives it away.

In 2016, market regulator Sebi restricted companies and its promoters and directors from accessing capital markets to raise funds or to take control over listed entities. Fresh registrations of any entity by its promoters and directors were also curbed.

Birla’s hurried disassociation from Vi suggests that he’d rather preserve and nurture businesses generating returns than salvage a bottomless pit.

That said, Vi’s is perhaps one of the rare cases where its customers, promoters, bankers, industry observers, and even competitors are rather sad to see if left with no option.

But where did the once upmarket telco product fail?

Bankers say the very rebranding as Vi from Vodafone Idea Limited was a giveaway that neither Vodafone Plc nor Idea Cellular saw a future in the business.

What was masked as a great rebranding strategy brought to light the deep in-fighting between the two promoters.

From friends to foes
It hasn’t been a joyville for Vodafone and Idea. Here are some of the recent events that acted as a catalyst and further worsened the problems for the two companies.

Vi's problems aplenty@2x

Now trading at INR5.8 apiece, Vi’s stock price has lost over 42% of its value in just four days or rather when it became apparent to the Street that the Birlas aren’t ready to rescue their baby.

Headed for dark days, here’s a word of caution to investors, especially retail investors who enjoy taking risky bets.

“Vi has been trying to raise INR25,000 crore since September 2020, but till date nothing materialised. Promoters have given up. Retail investors shouldn’t take optimistic positions hoping for a miracle to happen,” says a fund manager who didn’t want to be named.

Vi could end up like Jet Airways with a surprise investor willing to bail it out or turn into another DHFL where the entire equity was written down by its new owners.

“Either way, Vi is not a stock to play with,” warns the fund manager quoted above.

But is there even a shred of hope for Vi?

All eyes on the government
Relief from the apex court in terms of reassessment of the AGR dues, additional moratorium from the government to pay the spectrum related dues and a floor price regulation — these are some of the options that the company was looking at for its sustainability, but with the Supreme Court order dismissing the AGR plea, Vi has one option less.

While a one-time bailout like what the government did in the case of BSNL could help in the short term, it’s the long-term measures that need to be implemented if the government is really serious about maintaining a 3+1 player market.

These are some of the things that the industry as a whole is expecting from the government, but so far no action has been taken by the government.

Reduction in statutory levies such as licence fee, spectrum usage charges and contribution towards USO fund are some of the things that will have a long term positive effect on the telecom sector.

In addition to this, a complete rejigging of spectrum prices and licensing framework is the need of the hour. The telecom industry has evolved dramatically over the past decade and the policy and regulatory framework needs to evolve as well.

While there is only so much that the government can do, Vi needs to up the ante towards competition.

They need to show operational improvement. This will not only boost investor confidence but will also reduce banks’ reluctance to support. Simply relying on bailouts from the government or a favourable legal decision will not help.

Can Vi hope to see some light at the end of the tunnel?

Stay tuned with us for more on this.

(Data support by Rochelle Britto; graphics by Sadhana Saxena)

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