In what shows that it might be all but over for Vodafone Idea, the shares of Vodafone Idea fell by 40 per cent on Friday, losing US $ 975 million in market value.
The massive fall in Vodafone shares comes after the apex court rejected petitions filed by the telecom companies to review its order to pay 920 billion rupees (US $ 13 billion) in the form of overdue levies and interest.
The drastic fall in Vodafone Idea shares has come a potential threat to the survival of the ailing Vodafone Idea, a joint venture between Britain’s Vodafone Group Plc and India’s Idea Cellular. The joint venture is already embroiled in a deep crisis on account of US $ 3.9 billion in overdue payments against the joint venture.
After the Supreme Court ruling in October, the Vodafone group had described the state of its India venture as “critical”. Analysts at Credit Suisse said in a note, “With Aditya Birla and Vodafone groups unwilling to infuse equity in Vodafone Idea, we see a strong possibility of Vodafone Idea going for bankruptcy.”
Vodafone Idea has been battling for survival for quite some time now. Following the unexpected and sudden competition offered by Jio drove two telecom companies to bankruptcy. The survival instinct among telecoms prompted them to attempt and bring their plans near to Jio as well, however, such strategies backfired.
Vodafone, the second-largest telecom company in India, saw the re-entry of KM Birla’s into the telecom industry, as his group bought 11% of the Voda’s shares. In 2016, Idea Cellular, Birla Group’s flagship telecom provider ran into a dead-end, after Mukesh Ambani disrupted the telecom industry with the roll-out of JIO. The company, therefore, merged with British telecom major Vodafone in August 2018 to fight the aggressive price war in the market. However, there is no relief at sight for either Vodafone or KM Birla.
Last year, while speaking at the HT leadership summit, Kumar Mangalam Birla had said that Vodafone Idea Limited would have to shut shop, if the government did not announce a bailout package. “If we are not getting anything, then I think it is the end of story for Vodafone Idea,” said Birla.
He had further claimed that the government wants three private players and one government player in the telecom industry, and therefore it will help Vodafone Idea. “They have publicly stated that they want three players from the private sector and one player from the public sector, so I think we can expect much more stimulus from the government because it is required by the sector to survive. If we weren’t getting anything, then I think that is the end of the story for Vodafone Idea,” said Birla.
Faced with tough competition from Jio and Airtel, the shares of Vodafone Idea has already slumped last year. The company posted a net loss of 50,922 crore rupees in the last quarter, one of the highest posted by any Indian company in a single quarter.
The company has been unable to reverse the trend of a free fall in its fortunes. The subscriber base of the company declined by 9 million users in the September quarter, and average revenue per user (ARPU) slipped from 108 to 107. The analysts do not have any confidence in the sustainability of Vodafone Idea; most of them predicted duopoly (Airtel and Jio) in the telecom sector.
The entry of Mukesh Ambani-led Jio had forced many small players out of business and the merger of Vodafone and Idea, two of the largest independent telecom operators. Despite the merger, the combined entity has lost more than 5 crore subscribers; and is the second-largest telecom operator with 31.1 crore subscribers. Reliance Jio, which entered in the telecom market almost 3 years ago, has become the largest player with more than 38 crore players.
Even as Vodafone Idea seems incapable of reviving its dipping performance, the Modi government has not given in to the demands of a government bailout. It would have been a moral hazard, as well as loss to honest taxpayers. The Birla group is among the oldest business houses of the country, and it is used to Nehruvian era government bailouts. However, by not succumbing to vocal demands of a bailout, the Modi government has taken a big step towards a rule-based capitalist economy, where profit-making will be rewarded, and loss-making companies will be forced out of the market through Insolvency and Bankruptcy Code.