Voda Idea synergies to be realised by FY21. That will enable the cash generation from operations to improve, say Balesh
Sharma, CEO & MD, and Akshaya Moondra, CFO, Vodafone Idea, in interview with ETNOW.
Where is Vodafone Idea after creating this mega telecom company?
: Vodafone Idea creates a new company out of the merger of number two and number three telecom players. There are very strong sets of credentials whether you look at the infrastructure present already with larger pool of spectrum, well invested networks, fibre networks, two very strong brands as well as 387 million customers and of course, the parentage of the Aditya Birla and the Vodafone groups. So, we have got all that it needs to create a great company.
We believe the market has a huge amount of potential still to be tapped. The market is under-penetrated. With a billion sim cards, only half are using data. The other half will get into data. Opportunity has to be created to get them to use data. We are best poised for that because among non users of data, we have 46% market share between the two brands.
We are bringing the two networks together, creating the strength to be able to create a great customer experience and also to bring great profitability by reducing cost and bringing in synergies.
For us very clearly the priority is to integrate very quickly so as to be able to improve customer experience and profitability. We are bringing in all kind of digital ecosystem partners to contribute to the society by creating digital India. Also, we want people to find us a great place to work in.
How will a telecom company and shareholders benefit out of this big picture because there has been a disruptive wave of price drop? In next three years, will there be a significant improvement or will there be just an incremental change?
It is a 1.3-billion people market with three private players and one BSNL. It is a great place for everyone to be. The potential there is still untapped. When you develop your network in terms of coverage and capacity to take more and more customers up the data usage curve, there has to be a growth coming in for everybody even at the current prices. When you look at the pricing, it is a category which is limited by nature. There is only so much spectrum, there is only so much capacity that can be created but there is an unlimited demand. So, in a category with a limited supply and unlimited demand, you are selling below cost. This is unsustainable and this is against any law of economics. The reason it is happening is obviously beyond economics. However, consolidation has already occurred. It is an optimal level of competition with three private players and one BSNL in the play. All four are burning cash and are cash negatives. So this is not sustainable. This has to turn around even on the pricing but pricing is not the only growth I am talking about.
When prices go up, there is growth but even without that, at current prices as data usage goes up there is growth potential plus there is so much neighbourhood industries that are opening up where telecom has a role to play directly or indirectly. Strategies could be different to fructify that. However, whether it is retail or content or Fin Tech etc. there is huge potential for telecom companies to play and we have got clear plans towards that as well.
All we are saying is we will not directly do all that, we will focus on what our core is, give our customers a great experience, use the analytics to present to them the best offerings that the world has, rather than creating it ourselves.
We will bring it through partnerships. For instance, on content we already have partnerships with Netflix, Amazon, Zee and Sun TV. We will soon be announcing a partnership with one of the biggest music players in the world. We will not make it ourselves, but we will bring it to our customers.
There are two challenges for the company; one is the business environment which will not change overnight; and second is the financial challenge, the hole in the balance sheet, which you have managed to fix with the rights issue. In the Rs 25,000-crore issue, which will run between April 10 and April 24, existing shareholders will be able to buy 87 shares for every 38 shares held at an issue price of Rs 12.50 a share. Market view is this is good but not great. This will only take care of five, six quarters. Is it true?
I agree with that statement and let me explain how. In October-November, when we decided on this rights issue, the initial thoughts were about having a capital raise of a smaller size. Then the shareholders and promoters felt that at this point, we need to raise sufficient capital. So that question of whether the capital is adequate or not, goes out totally.
And with that intent, we came to size of 250 billion of equity raise, which as you would say that is about the largest equity raise by any private company.
From our perspective, it is enough and we will not need more capital. There are some figures I can share with you and some figures on which I can give guidance, not in terms of figures but qualitatively.
In October 2018, when we decided on this plan, we started with a cash balance of Rs 136 billion (Rs 13,600 crore) on our balance sheet, the equity raise will bring in Rs 250 billion (Rs 25,000 crore). We have already announced that as Indus Towers merges into Bharti Infratel, the Indus stake which Vodafone Idea has will be monetised and that is worth about Rs 55 billion (Rs 5,500 crore) today. So all in all, about Rs 440-450 billion (Rs 44,000-45,000 crore) worth of cash is available for the business.
Beyond that, we have an existing operation which is generating an EBITDA. We have already talked about EBITDA improvement coming from cost reduction. One of the ways to look at it is that if you say that Airtel is a good benchmark, that they are at a certain size of operation. Vodafone and Idea actually were two companies with somewhat similar size of cost structure. The cost structures were not very different but when number two and three come together, they inherit a cost structure. Most of the synergies that we are planning for today is just the deduplication of that cost. So, at a higher revenue figure, the cost structure will be same for a similar sized organisation. There is no reason why our profitability will be any lower, but it will take some time to get there. When we had done the merger announcement, we had said that synergies will be realised in FY23, but between the time the merger was announced and the time the merger got consummated, we had a lot of time to plan for this.
Now we have accelerated these synergies to be realised by FY21. That is one part which will enable the cash generation from operations to improve. The second part is we have made large investments in capacity creation and that was one of the reasons that before the merger, we were a bit constrained in terms of making the investment in coverage and capacity. That would have probably become a waste after the merger was completed.
As soon as the merger has been completed, we have accelerated a process of finalising orders, integration process on the network has started and that will now give us a significant capacity increase. I will come to the investment part later but when we create more capacity, we are able to migrate more subscribers from low ARPU plans to higher ARPU plans because that is a function of capacity.
As subscribers migrate to higher plans, that provides a revenue upside. This is not dependent on the market price rising which we believe is inevitable and will happen. We have a base EBITDA. It will improve from cost reduction which is just a deduplication of cost and we will get EBITDA improvement from subscribers migrating to higher price plans with the higher capacity being available to us without any improvement in the market prices which will happen later.
This will give us additional cash. The last item of cash which we are looking at is the fibre monetisation. We have got about 1,56,000 kms of fibre. We have taken steps to divest that into a wholly-owned subsidiary which then becomes a vehicle for monetisation. We are taking steps to get that monetised. That is a large asset. If we take all this into account, we are very adequately funded and I do not see us needing any further capital for the foreseeable future.