Why Vodafone Idea’s sensible plea didn’t make any sense to investors

You have to give full marks to Vodafone Idea Ltd for trying. When the newly merged company’s management met telecom analysts for the first time last week, it made a fairly logical case for an improvement in India’s telecom industry. They also laboured to point out that the company itself would soon be on a strong footing. The timeline for extracting full synergies from the merger had been advanced by two years, which, coupled with planned asset sales and equity issuances, would bring down leverage substantially, it said.

But all that effort was in vain. The day after the analysts’ meet, Vodafone Idea’s shares fell by 8.3%.

It isn’t difficult to see why analysts and investors were unmoved by the company’s sanguine outlook. While the gains from synergies were substantial and the leeway provided by the planned fundraise and asset sales can’t be ignored, all of this would amount to nothing unless tariffs rise. It has little choice, but to wait for Reliance Jio Infocomm Ltd to relent.

But Vodafone Idea is confident that tariffs will rise. “Market repair has to happen because one, it is unsustainable; two, it is making India uncompetitive; three, even Jio is burning cash. Ultimately, there has to be a rationale in doing business,” Balesh Sharma, chief executive officer, Vodafone Idea, said at a press meet.

Almost everyone agrees that current tariffs are unsustainable. However, where analysts disagree is whether this is a good enough reason to believe tariffs will rise. “Fundamental logic has not worked in this industry for years,” said an analyst at a domestic institutional brokerage. “The company’s reasons for a rise in tariffs are merely statements of hope,” said another.

Reliance Industries Ltd’s investors have been remarkably patient so far with the increase in indebtedness on account of Reliance Jio. In the September quarter, Reliance Jio ended with a 28% revenue market share, close on the heels of both Bharti Airtel Ltd and Vodafone Idea, according to the second analyst quoted above. Reliance Jio is likely to take the lead in the December quarter, if not the March quarter.

Analysts weren’t impressed with Vodafone Idea’s hopeful assessment of its balance sheet either. Its assertion that leverage will come down from 14 times Ebitda to five times after accounting for synergy benefits, asset sales and the fund-raise is already being contested. This is simply because the company has used trailing 12-month earnings for its calculations.

Ebitda stands for earnings before interest, tax, depreciation and amortization.

It makes far more sense to annualize the latest quarter’s earnings to reflect the current state of operations. Using this measure, leverage will reduce from 28.7 times to 6.7 times Ebitda, which is still far above comfort levels.

It’s little wonder the company also said “market repair has to happen”.