Vodafone Idea News: VI's stock fall by 20% after the stake dilution

Vodafone Idea has been in the news for a couple of years now - mostly bringing sad news for investors. The Tuesday morning news has brought the company in focus again. Let us look at all the details.

Government relief package

• The government of India in September has announced a telecom relief package for Telecom companies. It provided Telecom companies the option to convert interest on airwaves into equity, a spectrum payment moratorium, and reduced bank guarantees. 
• The company which benefited the most from the relief package was Vodafone Idea as it was able to save up to Rs 1 lakh crore cumulatively over four years. 

Equity stake sale by Vodafone Idea

On the back of the above relief package, Vi has come with an equity stake sale. The details are below - 

• The company has past AGR dues worth Rs 58,254 crore. As of now, it has only paid Rs 7,854 crore to the Indian government. 
• The Net Present Value (NPV) of the interest is expected to be about Rs.16,000 cr.
• The company will opt for converting the interest on the spectrum and Adjusted Gross Revenue (AGR) into government equity.
• Vodafone Idea said in the statement that the Indian Government will now own close to 36% stake in the third-largest phone operator in the country.
• The Indian government will now become the largest shareholder in the company. The two main promoters will have a reduced stake in Vi - Vodafone Group will now hold around 25.8% and Aditya Birla Group will hold 17.8% in the company.
• The average price of the company’s shares at the relevant date of 14/08/21 was below par value. Hence, the equity shares will be issued to the Government at a par value of Rs 10 per share.

Relief package and other Telcos

• As of now, Vi is the only company that has opted for the equity conversion.
• Bharti Airtel opted for the moratorium.
• Reliance Jio did not opt for any option.

News Impact on share price

The share price of Vi tanked more than 20% post the news as equity shares will be issued to the Government at Rs 10 per share. This is at nearly 33% discount to the previous close of Rs 14.85. This conversion will result in massive equity dilution to all existing Vodafone Idea shareholders.

The company has been planning to raise Rs 25,000 crore from global investors for the past two years. The sale of equity raises questions on its fundraising plan, and the confidence promoters have in the company.

Brokerage View

CLSA believes the company has averted a financial crisis with AGR dues payment for now. However, it pointed out that even after relief, Vodafone Idea will likely struggle to fund annual spectrum payments beyond an additional four-year moratorium unless Average Revenue Per User (ARPU) reaches approximately Rs 250-300. At the end of the four-year moratorium, there will also be an option to convert principal dues into equity, at the discretion of the government. 

CLSA has given an UNDERPERFORM rating on Vodafone Idea’s stock. CLSA has a target price of Rs 16 on the stock, hinting at a marginal upside. However, with the new developments, investors should keep watch on the new ratings from the brokerage firms.