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If Voda-Idea goes belly-up, shareholders will lose Rs 1.68 trillion

By Krishna Kant & Dev Chatterjee
November 21, 2019 14:06 IST
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Collapse of the mobile operator could translate into total loss of nearly Rs 44,000 crore for the AV Birla group.

Shareholders of Vodafone Idea will lose Rs 1.68 trillion of their equity investment in the event of liquidation under the burden of mounting financial liabilities.

Of this, nearly Rs 99,000 crore is the cumulative equity investment by the company shareholders, including the AV Birla group and Vodafone Plc, over the years, and the balance is the reinvested earnings of the company.


The equity investment includes the firm’s recent rights issue, which resulted in the shareholders putting in fresh equity capital worth Rs 25,000 crore.

Banks had an exposure of Rs 1.25 trillion in the company at the end of March this year.

Shares of Indian banks fell on Wednesday after Vodafone Group chief executive officer (CEO) Nick Read said Vodafone Idea might go into liquidation unless the Indian government eased the demand for spectrum dues as ordered by the Supreme Court last month.

State Bank of India’s shares fell 3.69 per cent and ICICI Bank was down 2.24 per cent, as investors feared additional provisions for Vodafone Idea exposure.

A collapse of the mobile operator could translate into total loss of nearly Rs 44,000 crore for the AV Birla group, considering its 26 per cent stake in the company.

In the past, the group has indicated its inability to make any incremental equity investment into the company, and is willing to completely write-off its investment.

This, analysts say, could hit the balance sheet and profitability of Grasim Industries and Hindalco, which own stakes in the company.

The group’s flagship Grasim Industries is the single-largest shareholder (from the AV Birla side), followed by unlisted Essel Mining and Hindalco Industries.

Grasim had an 11.6 per cent stake in the mobile operator at the end of June and, like the rest of the shareholders, invested in Vodafone Idea’s rights issue at Rs 12.5 a share.

Vodafone Idea closed 7.5 per cent down at Rs 3.7 a share on Wednesday, giving it a total market valuation of Rs 10,632 crore.

The analysis is based on the historical fund flow of the Vodafone Idea since it first began reporting its numbers in 1997-98.

The total shareholders’ investment has been adjusted for the cumulative dividend paid by the company and cumulative investment in listed and unlisted securities.

Analysts, however, say that Vodafone Idea’s financial liabilities are much higher than the financial resources available with the listed companies of the Aditya Birla group.

For example, the three listed AV Birla group companies - Grasim, Hindalco and Aditya Birla Fashion - together generated free cash flow worth only Rs 611 crore in FY19.

In all, the group has had negative free cash flows in six out of the past 10 years.

It’s same with Grasim Industries, the main vehicle of the group diversification in the past.

The firm posted negative free cash flows of Rs 11,540 crore on a consolidated basis in FY19 - a third consecutive year of negative free cash flows.

Analysts attribute this to a string of mergers and acquisitions by Ultratech Cement, its listed cement subsidiary.

This, analysts say, rules out a large fund infusion by Grasim Industries in Vodafone Idea.

“I don’t think Grasim Industries or other group companies are in a position to meet the funding requirement of Vodafone Idea given the sums involved here,” said an analyst.

The mobile operator is liable to pay Rs 28,300 crore to the government in accordance with the Supreme Court judgment on adjusted gross revenue (AGR) of telecom operators.

This liability is over and above the company’s regular annual average capex of around Rs 6,000 crore in the last decade.

It spent around Rs 2,840 crore on capex during the first quarter of FY20 and reported a net loss of Rs 4,874 crore in the first quarter.

It is slated to announce its second-quarter results on Thursday.

Like Vodafone PLC, the Aditya Birla group will also be limiting its exposure in the telecom sector, which is fast becoming unattractive for all players due to high competition and falling tariff.

According to an agreement signed between Vodafone Plc and the Birla group to merge their respective telecom companies in March 2017, the AVB group had the option to buy an additional stake in the merged entity from Vodafone Plc so that the stake of both Vodafone and the AB Birla group equalises.

This transaction will not take place now.

Vodafone is also free to sell shares, earmarked for the Birla group, in the market.

Vodafone currently owns 43 per cent in Vodafone Idea and is a senior equity partner in the merged entity and runs day-to-day operations of the company.

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Krishna Kant & Dev Chatterjee in Mumbai
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