Ambareesh Baliga, Independent market expert
I am cautiously optimistic about Vodafone Idea because I believe that the government will provide some solution. Its survival could be in question if it is asked to pay the penalty immediately. The government can’t risk this as it will be self-defeating due to collateral damage. First, just like other telecom companies that have sunk, DoT won’t get any money, if Vodafone Idea sinks. Second, it will add to NPAs of banks as the telecom giant has a debt of around $14 billion. Finally, with duopoly or a monopoly, tariffs would shoot up. So, the government will have to ensure that Vodafone Idea survives to pay the penalty and service the loans. This doesn’t mean government or DoT would have to forgo the penalty — it may have to structure the payment to match future cash flows. I also expect the IUC to continue beyond 2020. The government is also likely to sort out the GST input tax refund issue, which will help the telecom sector. ARPUs will also go up as the current tariff rates aren’t profitable for anyone, including the leader. So, once these issues are sorted out, Vodafone Idea could become the new discovery for the market.
Rajiv Sharma, Head of Research, SBICap Securities
We have been negative on Vodafone Idea, even without taking into consideration the impact of the SC ruling. The stock corrected sharply post the verdict, however off late markets seems to be building for some potential relief from government. If the amount to be paid, including interest and penalties, is 283 billion, it would imply a per-share impact of 10 and worsen net debt/Ebitda ratio from 25.4x to 32.6x. Clearly, Vodafone had a stretched balance sheet. So, not only will they find it difficult to participate in 5G spectrum auction anytime soon, but even 4G deployments are a matter of concern. On the cost side, they have done well so far as benefits of mergers have played out. However, they have to stem the loss of subscriber base, generate healthy revenue and invest in 4G capex, for which they need a strong balance sheet. Unless the telecom sector tariffs improve, the possibility of upside in Vodafone Idea is limited. A stretched balance sheet is a significant drag, so valuation-wise the comfort is not there, and the SC order has added to the scepticism.