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Vodafone Idea: Government’s equity conversion for moratorium interest to lead to ~55.7% equity dilution for shareholders

News: On expected lines, Vodafone Idea (VIL) has opted for Equity conversion for interest payment (of ~Rs. 16000 crore NPV) towards deferred spectrum and AGR payout during next 4 years. Since the average share price at the relevant date of 14.08.2021 was below par value, the equity shares will be issued to the Government at par value of Rs10/- per share, subject to final confirmation by the DoT. Following conversion, it is expected that the Government will hold around 35.8% of the total outstanding shares, and that the Promoter shareholders would hold around 28.5% (Vodafone group) and around 17.8% (Aditya Birla Group), respectively.

Views: This brings about clarity on incremental liability due to AGR/Spectrum due moratorium and ensures medium term going concern issues. However, it would lead to ~55.7% dilution for the existing shareholders. Moreover, we believe near term fund raise (required for capex needs) and medium/long term ARPU step up to Rs. 240-250 levels is key for VIL to turn a meaningful competing entity against the peers.

Impact: Negative