Vodafone Idea's financial stress to impact tower industry

An ICRA report said that Vodafone Idea Ltd (VIL) has been under financial stress as reflected by mounting losses and burgeoning debt levels, which is likely to impact its financial lenders as well as the government, apart from having a bearing on its employees, its subscribers, and associated industries, most prominently towers.

"In case of VIL exit, the tower industry might be staring at the vacation of around 180,000 tenancies that VIL currently occupies. Of these, only 40-50 percent of the tenancies are expected to be regained by the tower companies over a period of 18-24 months," it said.

Given the precarious position of the balance sheet of VIL, material external support might be necessary, ICRA said, adding that the support can be in the form of deferment of spectrum dues, reduction in levies, and reduction in interest rates, among others.

The financial position of VIL has been deteriorating due to mounting losses and increasing debt levels. As per an ICRA note, this stress is likely to impact financial as well as other stakeholders and can impact the industry structure.

ICRA Group Head & Senior Vice President, Sabyasachi Majumdar, said: "Over the last 12 quarters starting Q2FY2019, VIL has been reporting sizeable losses. Further, with the addition of AGR liabilities, the debt has burgeoned to more than Rs 2 lakh crore as on June 30, 2021 (including lease liabilities)."

VIL occupies 35 per cent tenancy share and 36 per cent revenue share. In a situation of VIL shutting down operations, tower companies will have to face a loss of these tenancies, translating into revenue and EBITDA decline for the industry.

However, in that scenario, the existing 255 million subscribers of VIL will be taken up by the active telcos, who will have to expand their network presence to cater to a large additional subscriber base.

ICRA expects that the existing telcos will gradually take up only 40-50 percent of VIL's tenancies and the total tenancies for the industry by FY2024 are likely to remain lower than FY2021 levels. The demand for loadings and high-power small cells is expected to remain elevated for the tower industry.

Apart from tenancy loss, tower companies will also bear the brunt of write-offs for VIL's receivables, which have been witnessing a steady increase lately. With this, while the debt metrics are likely to witness moderation, relatively low debt levels and the strong liquidity position of the tower companies are likely to alleviate these concerns to some extent.

The government is said to be considering a relief package for the stressed telecom sector which is likely to support Vodafone's Idea to sustain and avert a possible duopoly in the market.