Vodafone Idea Limited (IDEA) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. This is Ryan, the moderator for your conference call. Welcome to the Vodafone Idea Limited conference. [Operator Instructions] Please note that this conference is being recorded. We have with us today, Mr. Ravinder Takkar, Non-Executive Chairman of Vodafone Idea Limited; Mr. Akshaya Moondra, CEO of Vodafone Idea Limited; and Mr. Murthy GVAS, CFO of Vodafone Idea Limited, along with other key members of the senior management on this call. I want to thank the management team on behalf of all the participants for taking valuable time to be with us. Given that the senior management is on this conference call, participants are requested to focus on the questions related to the recent developments only, to make sure that we make good use of the senior management's time. I must remind you that the discussions on today's call may include certain forward-looking statements and must be viewed, therefore, in conjunction with the risk that the company faces. With this, I now hand the conference call over to Mr. Akshaya Moondra. Thank you, and over to you, sir.

Thank you, Ryan. A very warm welcome to all participants to this conference call. Thank you for joining us today. We have organized this update call to apprise you of our Mega network equipment order and some key developments. As you would recall during the previous earnings call, I had diluted to our ongoing discussions with our vendors or supply of network equipment. Most of you would have seen our media release over the weekend or today, I am pleased to share that we have concluded deals worth about 300 billion or INR 30,000 crores with the three global players, namely Nokia, Ericsson and Samsung, or supply of network equipment over a period of 3 years. We have continued with our existing long-term partners, Nokia and Ericsson, with whom we have a relationship since inception. We have also onboarded Samsung as our new partner. This is one of the key steps towards the rollout of the company's transformative 3-year CapEx plan of INR 500 billion to INR 550 billion. The overall CapEx program is directed towards expanding the 4G population coverage from INR 1.03 billion to INR 1.2 billion, launch of 5G services and capacity expansion in line with the data traffic growth. I'm happy to share that the company has activated its growth cycle with the kick starting of the planned CapEx, we will be able to expand our 4G coverage and launch 5G as a result of which our cash from operations will improve. A large part of that cash generation will go towards payment of government obligations. As you know, our bank debt is now at a very low level of around INR 48 billion as of the end of last quarter. Even post the new debt fundraising, the cash requirement to service such debt will not be very large. Further, as mentioned during the last earnings call, we have almost completed our [ QIP ] Win CapEx. This CapEx along with spectrum acquired in June 2024 spectrum auction enabled us to increase our data capacity by about 15%, and also expand the 4G population coverage by about 16 million compared to March 2024. As a result, we are witnessing a meaningful improvement in data speeds and improvement in customer experience in the geographies where these rollouts have been completed. On the bank facility, we are in an advanced stage of discussions with existing as well as new lenders to buy up INR 250 billion of funded and INR 100 billion of nonfund-based facilities. One of the major steps in this debt fundraising process was the completion of techno economic evaluation by an independent third party engaged by SBI, our lean banker. This evaluation has been recently completed, and the report has been submitted to all the banks and financial institutions, which will allow them to not progress with their internal evaluation and approval processes. We expect the bank funding to conclude in next 7 to 8 weeks. We had a closing cash balance of about INR 180 billion as of June 30, 2024, and we are sufficiently funded to execute the CapEx plans in the interim. On the AGR matter, the Honorable Supreme Court has dismissed the curative petition filed by telecom companies. The curative petition was raised on the limited aspects of the AGR issue, that is to correct the errors and demands and waiver of penalty and interest thereon. In the honorable court's opinion, the petition did not meet the criteria laid down for admitting the curative petitions. Based on this, they did not accept the petition, and therefore, there was no discussion on the minutes of the case. While a positive outcome would have no doubt eased the overall liability and enable faster deleveraging, we would like to reassure you that our long-term business plan and revival strategy remains unaffected. In fact, our long-term business plan, which has been shared with the banks and on the basis of which the techno-economic evaluation has been done, has been constructed without considering any potential benefit in the AGR matter. Hence, while the outcome of the curative petition is disappointing, it does not have any impact on the long-term business plan of the company and its existing liabilities. Also, I would like to clarify that the curative petition outcome does not create any impact or modification on cash flows, as already considered in our business plan. Most significantly, the government's commitment to support the three private player markets remains unwavering, with 23% shareholding and receivables of over INR 2,000 billion from the company, government is the single largest stakeholder in the company. In light of the curative petition dismissal, we have initiated a fresh dialogue with the government on likely remedies. To conclude, it has been a very eventful few months for us here at Vodafone Idea. Between March to July, the company has raised INR 240 billion of equity including preferential equity raise of INR 24.6 billion from Nokia and Ericsson. In June 2024, spectrum auction, we acquired 50 megahertz of spectrum across low-band and mid-band in spectrum in 11 circles. The additional 900 megahertz spectrum acquired in 7 circles allowed us to dedicate adequate 900 megahertz band spectrum for 4G, thereby enhancing the experience of our 4G customers in these markets. In July, the new tariff plans became effective across the industry, which marks a wise step towards improving the returns in the industry, further considering the large investment requirements, industry will need further price increases. Finally, with the recent closure of our equipment agreements, we are firmly on our journey of Vi 2.0 and from hereon, we firmly believe that we will stage start smart turnaround to effectively participate in the industry growth opportunities. I would like to inform you that on this call, we will only address questions relevant to these recent developments. With this, I will hand over the call back to Ryan and open the floor for questions and answers.

[Operator Instructions] The first question is from the line of Sanjesh Jain from ICICI Securities.

The first one is on the Supreme Court ruling. Is there any further possibility for us to pursue this, or this ends any effort on the relief side for the AGR liabilities?

Sanjesh, this is Ravinder Takkar. Let me take that question. So I think, to answer your question, from the court perspective, we believe that this is the final outcome from the courts in regards to the curative petitions, because we believe that was the final that we could make. What is possible, which I think is quite important is to pursue further remedies and possibilities with the government. I can tell you that we have been engaging with various senior government officials. Actually, we were engaged with them prior to the court ruling, and certainly, we have even after the court ruling. I think all the engagements have been with a very clear view from every side, to that the merits of our case on the AGR in regards to the calculation errors and mistakes. And then, of course, interest in penalties on those mistakes, the merits are quite strong and correct. And while there was a hope that the courts will, obviously consider the petition, the fact that the court has not done so means that they now action and responsibility in some ways, falls squarely along with the government. The government has since that time asked us to put together a comprehensive view of what we believe will be the right mechanism and requests that we can make for addressing this challenge, because I think there is a very clear understanding of the government, that it should not be fair to have to ask us to pay for something which is a calculation error. And so we are in the process of putting together that -- those requests. We will be engaging again with the government in the coming days on those requests. We expect a very strong engagement with the government, as it has been, to be honest, with the industry for the last 4 years. I mean, since before the reform package in 2001, the government has been very engaged with the industry, as was mentioned by Akshaya, they are very committed and continue to be very, very committed to three strong private players. Not only was the reform package done, then, of course, there was the government equity conversions in 2023. And so since that engagement has been very strong. And as I said earlier, that even on this AGR topic, there's very few discussions about the merit of our case. I think the understanding is that merit is quite strong and correct. So we expect to engage further with the government and look forward to working with them and finding a solution for this challenge, and hopefully, we can together work with them to find a mechanism for relief on this matter. And we strongly feel that, that is very possible. Given the engagement from the government, given to their point of view, on what is the right thing here, we expect to sort of continue to pursue that. Obviously, not in the courts, but not directly with the government.

Got it. Got it. That's clear. But will this require any change in the regulation to be completed? Or this is possible in the course of the event like relief package, what we have seen earlier?

Sanjesh, I think it's a bit too early today to talk about the mechanisms. We believe that the government of India has many, many levers and mechanisms by which they can address the situation. So I wouldn't like to speculate on what can be used and what are the possibilities, but we know that there are several options and several possibilities. Of course, the intent is to find a way which works the best for everybody in the industry, as well as a solution that is fair for all the participants in the industry as well, as well as fair for the government as well. So I wouldn't speculate on the mechanism. But certainly, I think we know that there are several mechanisms by which this can be addressed.

Fair enough. That's pretty much clear. One, Akshaya, you said that the cash flow which business will generate will largely go into paying the liabilities to the government. What about the current liabilities, which is outstanding for that? How are we planning that payout?

So I think, basically, the liabilities which we have today, one is the bank loans, which I said is about INR 48 billion. There are some overdues to the vendors, which largely or a large part of that is cleared, and they are getting cleared, regularly. I didn't mention that separately because that is part of business as usual. And as we have mentioned earlier that we are -- our CapEx guidance for the next 3 years is about INR 50,000 crores to INR 55,000 crores. That will be funded out of the equity of INR 20,000 crores, which has been raised and the bank funding of INR 25,000 crores plus the non-funded facility, which will enable us to get the vendor credit of about INR 10,000 crores. So that takes care of the CapEx, which means the cash generation from the business will only go towards paying the other liabilities. The largest one is the government deal. There's a small part of the bank debt outstanding, which I mentioned. And there are some remaining vendor overdues, which are being cleared as we speak.

Two follow-up small questions. One, when do we expect this CapEx to take it, now that we have agreed on the vendor equipment and everything. When should we see supplies coming in actual rollout starting and accelerating? So that's number one. Yes.

So we should start seeing the deliveries in the second half of the next quarter. And this deployment will then once it starts, then it will continue in full flow. It's just that there is some lead time for the vendors to not take the orders and start supplying. That will take some time. And so generally, and I mean, I would just add to that is that, earlier, we had a very tight situation over the last 2 years where the global demand was pretty high. And I think that situation has eased off. So really, we -- our understanding is that once the initial lead time of the first suppliers is taken care of when supplies will come on a very regular basis, and we'll be able to deploy very fast.

Got it. And why do we are looking for INR 10,000 crores of non-funded funding from the government side? The guarantees are it to be continued?

No, no, no, sorry. I said that the INR 10,000 crores will be largely LC facility, not the bank -- will enable us to get the vendor credit.

So you said nonfunded, I was just trying to get. No, no, it's clear. It's a LC, not guarantees.

Yes.

But that will be for a very limited period, right? Once the equipments are imported and the payment is done, that LC will vacate, right?

No, no. So this remains a revolving kind of facility. So you open an LC, you get some deliveries, and we are talking about a 3-year CapEx guidance. So 1 year credit will mean it will rotate. And then this is a facility which continues. I mean, beyond 3 years also, there will be a -- so this is fundamentally a revolving LC facility.

Got it. One last question. So now, standing in March '26, the cash outflow liability, how much do we see, assuming that there is a conversion of equity from the government side for the moratorium, which has already been announced, what should be the potential annual payout starting FY '27 for the government deals?

So let's say, starting from FY '27, the total payout to the government is INR 43,000 crores annually of INR 430 billion. Out of that, about INR 170 billion is the deferred series of installments, which are covered by the reforms package and which can be converted and there is INR 260 billion of installments, which would be the regular installments, which were due without the moratorium.

Got it. Sir, the INR 170 billion, can this still be converted into equity, right? The INR 260 billion is what actually goes off?

That's right. That's right.

Akshaya, if I can add to that is that this is, of course, Sanjesh, not including any potential relief that we would see on AGR, which could also be -- further discussions with the government. So obviously, these numbers are all not including anything for the relief that we talked about.

The next question is from the line of Vivekanand with Ambit Capital.

So the CapEx that you announced recently covers INR 300 billion of the INR 550 billion that you want to action. May I know what part of the three goals that you had set for your INR 550 billion CapEx gets covered in the current contract? That's question one. I'll ask the second question after you answer this one.

Vivek, thanks for the question. I'm not very clear, let's put it this way, that what we have announced right now is the radio equipment agreement, which is the largest chunk of any telecom CapEx. Now this actually will contribute to all the objectives, whether it is 4G, 5G, incremental capacity, everything is covered here. Largely, the items outside of the radio are core and fiber, which are core is more generic, fiber is more related to that you do a certain amount of 4G, certain CapEx, if you do 5G, then the requirement of fiber is low. So the balance amount of INR 250 billion would cover the other elements. But at some level, they go hand in hand. And as we enhance our radio coverage and radio capacity, we will also be enhancing our core and the fiber coverage and capacity. I mean core is basically capacity, but in case of fiber, both the coverage and capacity, as a part of the remaining CapEx. Does that answer your question, if I understood your question correctly.

Yes, yes, I understood. And so you're saying that all of your aspirations, whether it's 4G coverage expansion to 1.2 billion, near doubling of capacity over the next 2 years and 5G rollout, the radio CapEx for all of it is covered in this announcement. And separately, you will be deploying fiber CapEx and core CapEx on a need basis, correct?

Yes. And some of these, I mean, do not require ordering some of these spend and some of the other RFPs have already been concluded. So actually, what we have concluded is more than the 300 billion, which we have announced, if you look at, in overall terms. But what we have announced by way of the press release is largely the radio part of the ordering, which is the largest and most critical part of any telecom equipment suppliers.

Okay. Great. The follow-up I have to this order is, now that you have vendors willing to work with you. Previously, they had -- you elected to issue shares to vendors in lieu of some of your outstanding payments. Do you still retain some of these provisions in the current contract? And secondly, what form of -- or how much of a vendor credit are you getting in these new orders?

So let me just be very clear that conversion of the used to equity was a onetime exercise. This is not a part of our ongoing contract. Basically, whatever will be the new supplies will be covered by the new contract, which does not have anything to do with the equity. These are to be paid for. So I think, that helps to answer your first question. Secondly, the way we have to look at the LC or the vendor creditors that we generally have a 1-year credit against LC from our large vendors, and this works on a revolving basis. So basically at INR 10,000 crores of LC facility would enable us to cover or get vendor credit to that extent on a continuing basis. Our CapEx will, of course, be higher than the INR 10,000 crores of figures that I'm mentioning. But everything is not the supplies. There are lots of other things also. So generally, a INR 10,000 crore facility would cover what needs to be secured by an LC, out of the total annual spend, and that's where we have [indiscernible].

Okay. My last question is on the thought process with respect to say, churn, because the only difference that I see between you and job peers in a meaningful way as far as subscriber acquisition is concerned, it's churn. As your share of gross adds is higher than your current customer market share. So when you envisage or chalked out this CapEx plan and now you are making progress in deploying the network. By when can we expect enough deployment to happen such that you are able to stem churn? And related question is, if there is anything that you would like to call out in terms of your diagnosis for the elevated churn. That will be great.

So two things. In terms of -- we have always said that once we make the investment, we will be able to arrest our churn. So that instead of losing subscribers, we should start participating in the growth of the industry. I would say that once our supply starts coming end of next quarter and then some amount of rollout is happening and it gains momentum in Q4 of the financial year. We should start seeing the subscriber metrics improving from that, right. When does it turn to positive? It's a difficult thing to say, but I would expect that towards the end of the financial year, we should be getting into that where our rollout will be significant, and we should see significant change in the customer experience. So I think that's the way I will describe it.

Fair enough. And last question, because it's related to the series of questions that I've asked. At what pace do you think it is logistically possible to roll out? Because we have seen your competitors roll out very aggressively, maybe 40,000, 50,000 sites also, on an annual basis. Is that something that is achievable once you start receiving the equipment by mid of the coming quarter? Or are we thinking about this very ambitiously?

So Vivek, I think as we have mentioned in the past that our goal for deployment, the highest priority is 4G coverage, because we believe that is the -- if not only, the most important factor which is resulting in the churn. That we have said that we will be getting from 1.03 billion to $1.2 billion over the next 12 to 15 months. I don't think there will be any limitation in terms of ability to roll out because the ability to roll out is dependent on, let's say, three major factors. One is the internal planning. Our planning is absolutely ready. Second is the ability of the vendors to supply the equipment or the availability of the domestic local vendors who provide the installation services, or the organization of the same vendors who provide these services. I believe over the last 2 years, as far as the Indian market is concerned, we have seen a peak deployment. The deployment, which we are looking at is going to be much lesser than that. It is also lesser than the size of execution, which we did at the time of our own integration project. So whichever way you look at it, I think the rollout of population coverage for 4G that will go at some pace, and there is more deployment limitation there. As far as the 5G and the traffic, the capacity growth, whether on 4G or 5G is concerned. Again, these are not impacted by ability to deploy, but this is something which will go as the market evolves. So while 4G population coverage will progress with full steam. The capacity deployment, of course, depends on how the traffic is going and what is the capacity required and where it is required. So in summary to the response to your question is, that capacity or the ability to deploy is not a limiting factor and whatever we are planning.

The next question is from the line of Aditya Suresh with Macquarie.

Most of my questions have been already asked. Maybe if I can add one more. Actually, you mentioned about the business plan has been submitted to your partners. Is there any controls which you can share in terms of the underlying assumptions or on the cash flow generation or tariff? Anything that you can share on these plans, so that we can get a bit more comfort around kind of how you're thinking the business shapes up in the next few years?

I think I will not be able to discuss too much here, but let me mention a couple of points which I believe are probably more important for anybody to kind of model out some kind of a cash flow projection. One is that we had a price increase in July. We have factored in the next tariff increase of a similar size, to happen somewhere after a 15-month's time frame from the large price increase. So I think that is one assumption. In terms of our cash flows, what we have assumed is that in the second half of FY '26, both for moratorium and in FY '27, which is also the first full year after the moratorium, about INR 290 billion of the deferred series of installments which will fall to post the moratorium, they will be converted to equity. I believe these are the two most relevant assumptions, which I can share with you. And then, of course, there's a lot of operational modeling which happens, which I think everybody can do their own modeling. But these are two inherent assumptions important assumptions, which will probably help you to model anything that you're planning.

The next question is from the line of Wartarajan Sivasankaran with Antique Limited.

I was wondering if you can provide some details on the 5G rollout as well. So because of 4G, you mentioned the kind of coverage you are in 5G. Do you have any kind of targets we can work with for 5G as well?

So on 5G, we have a significant part of the INR 550 billion of CapEx guidance. In fact, I can tell you that 5G in terms of absolute amount, is more than 4G. That also happened somewhat because 5G requires more of fiber rollouts. If you include everything, 5G is the larger amount of the CapEx as per the plan. The only thing which I have been adding on all my earlier commentaries is that, 5G, we look at in the Indian environment and some of these things are true of the global markets also is that, firstly, monetization of 5G is still not happening. In fact, because of the metered 5G users that is happening today. It is, in some ways, become a means of discounting. We do believe that, that will get addressed over a period of time, but that is market evolution. Secondly is the case of use cases, and on the consumer side, we have seen very few use cases. And I've been talking to many investors when I meet them on different conferences and different interactions and most investors also, they tend to, as users say that most of the time, they don't know even if they're using 5G, whether they are on 5G or 4G. So to that extent, that is happening because there is not so much of a use case. And third factor is, of course, the evolution of 5G in terms of penetration of devices, which I believe is happening at a fairly rapid pace. So we will keep on looking at all these market factors as the market is evolving, and either accelerate or maybe slow down if necessary, the plan that we have for 5G deployment. So that is how I would describe the 5G deployment, but we are going to cover our key markets, key geographies, wherever we believe that there is a large penetration of 5G devices where the traffic is high. where, in any case, if the traffic is high, 5G rollout does make a lot of sense because per unit of capacity, 5G is the most optimum CapEx to incur.

Just to that point, if you're looking at the flexibility in terms of implementation. So should I assume this 3-year kind of a contract could actually get stretched to 4 or 5 years with vendors?

So I think the way this works is that, there is an agreed commercial, which are valid for 3 years, that doesn't mean that the CapEx stops after 3 years. what happens at the end of 3 years is to be discussed with the vendors at that point of time. So generally, the way this has worked in this industry that whenever these long-term agreements are done. They are done for a given period of time, which is normally 3 years. And after 3 years, you get weather, again, evaluate the situation and then whatever new ordering has to be done new discussions have to be done, they are done at that time. So that is more business as usual. Yes, the timing of deployment could be slightly shorter than 3 years, could be slightly longer than 3 years on the 5G. But I don't think it will be materially different. All that I want to register is that, 5G is a space which is evolving, and we have to keep in mind the evolution of the market and not just say that this is not plan, and I will just invest in size. That's the limited point timing.

the next question is from the line of Aditya Bansal from Kotak.

So two questions. First one, can you please provide some update on the bank guarantee discussions we are having with the government? Is that a part of discussions with the banks? Would that be a bottleneck? Any comment on that?

Yes. So on the engagement with the government on the bank guarantees, as we said, we have several topics that we agreed with them, bank guarantee is one of them. It's a very clear understanding with them that we are given our current negotiations with the bank, we are not in a position to provide those bank guarantees. I think the government itself has actually said that the industry has matured. And as a result, maybe bank guarantees should not be required. And of course, as you know, that they have waved off this bank guarantee requirement for actions that have been taking place for the last couple of years. We expect that given that position of the government that they will come up with a solution which the bank guarantees will not be required. Again, we have very positive feedback from the government, that this is not something that adds value to anybody. And I think it is a legacy from the past, I should be taken care of. We expect that to be addressed as well. In some ways, those are independent of some of the other discussions that I had mentioned earlier, because this is much more short term, and we expect the resolution of that actually come quite quickly. So -- so please keep an eye on that in the coming days and weeks.

And can I maybe add that is also a part of the COI representation to the government that's bakes.

And the second one is on the quantum of the new 4G and 5G sites, like for SPO, we had put out a certain number of sites. This contract covers like what quantum of the new 4G and 5G sites? Any color on that will be helpful?

So Aditya, I think 4G, I can give you a guidance on a number of sites. We currently have about 170,000 4G sites, the total physical sites that we have at about 183,000 basis the target of 1.2 billion of population coverage. We believe we will need to grow our sites to about 200 -- somewhere between 215,000 to 220,000 which is a part of our plan. As far as 5G is concerned, I will not be able to give you any guidance as far as number of sites is concerned. But if you are looking at the SPO document, it was part of the overall CapEx plan that we have both for 4G and 5G over the period of 3 years.

Sure. And fair to assume that 5G firstly, will be the leadership circles in metros and north of pan-India launch?

We have got 5G spectrum in 17 circles. I think we will be launching 5G in all the circles. What is important to see is that in a given person what are the places you need to launch 5G. So we are not looking at selective circles, all our 17 priority circles, we will roll out 5G.

Thank you. Ladies and gentlemen, due to paucity of time, we would have to conclude this conference. Thank you for joining us. You may now disconnect your lines.