Rating Rationale
February 19, 2020 | Mumbai
Vodafone Idea Limited
Rating downgraded to 'CRISIL B+'; Continues on 'Watch Negative'   
 
Rating Action
Rs.3500 Crore Non Convertible Debentures CRISIL B+ (Downgraded from 'CRISIL BB'; Continues on 'Rating Watch with Negative Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its rating on the Rs 3,500 crore non-convertible debentures of Vodafone Idea Limited (VIL) to 'CRISIL B+' from 'CRISIL BB'. The rating continues to be on 'Rating Watch with Negative Implications'.
 
The rating action reflects CRISIL's expectation of a lower likelihood of any relief from Government of India after the Supreme Court (SC) on February 14, 2020, did not grant any relief under the modification request filed by the telcom companies (telcos), including VIL. Further, SC has directed the telcos to make the payment before the next hearing on March 17, 2020.
 
Subsequently, DoT had sent notices to telcos (including VIL) regarding immediate payment of adjusted gross revenue (AGR) dues on February 14, 2020. In order to comply with the order, VIL has partially paid Rs 2,500 crore to DoT on February 17, 2020 and is expected to make further payment of Rs 1,000 crore by the end of this week. However, the amount payable is likely to be much higher than the above amounts, thereby enhancing the risk of invocation of bank guarantees provided by the company towards AGR related dues to DoT. This will in turn lead to significant deterioration in VIL's financial risk profile.
 
VIL had made a total provision of Rs 44,150 crore (Rs 27,610 crore towards licence fee and Rs 16,540 crore towards spectrum usage charges) till the quarter ended September 30, 2019, for the disputed liability towards AGR. The existing liquidity (about Rs 12,530 crore as on December 31, 2019) will be insufficient if there is a payout of AGR liability of Rs 44,150 crore.
 
The rating remains on watch negative pending clarity on the funding plan by VIL for clearing AGR dues; further relief, if any, to be provided by the government. CRISIL will remove the rating from watch negative and take a final rating action once there is clarity on these issues.
 
Operating performance of VIL continues to be modest as compared to peers. Earnings before interest, tax, depreciation, and amortisation (EBITDA) was Rs 1,284 crore in the third quarter of fiscal 2020, a sequential increase of about Rs 230 crore over the quarter ended September 30, 2019. Further, as per the Telecom Regulatory Authority of India (TRAI), the company lost 8.5 crore subscribers over the 12 months through November 2019. Continued subscriber loss has negated the benefits of higher average revenue per user (ARPU) and synergy benefits.
 
Despite the hike in tariffs, debt protection metrics are expected to remain weak on account of payout against the AGR-related dispute, and delay in planned monetisation of assets. Accordingly, as per our estimates, net debt to EBITDA and interest coverage ratios could remain over 20 times and below 1 time, respectively, for fiscal 2020.
 
The rating reflects VIL's established market position in the mobile services segment in India. These strengths are partially offset by continued weak operating performance leading to modest debt protection metrics, and vulnerability to regulatory changes and technological risks.

Analytical Approach

CRISIL has combined the business and financial risk profiles of VIL and its subsidiaries because all these entities, collectively referred to as VIL, operate in the same business and have a common management.
 
Refer to annexure - details of consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Established market position in the mobile services segment in India
Post-merger with Idea Cellular Ltd (ICL), VIL has emerged as one of the significant mobile operators in India. It had a gross revenue market share of 29.1% in the quarter ended September 30, 2019 (excluding National Long Distance and International Long Distance revenue), subscriber market share of 29.4% as on November 30, 2019, and spectrum holdings of 1,846 megahertz (MHz), of which around 1,724 MHz can be utilised for deploying any technology'2G, 3G, 4G, or 5G. VIL has been providing wireless voice and broadband services across all 22 circles in the country, and the quantum of spectrum available provides a cushion to handle future requirement.
 
As of January 2020, VIL has already completed network integration in 17 circles. The ability to seamlessly transition to a unified network while sustaining market position will be a key rating sensitivity factor.
 
Weaknesses
* Modest operating performance leading to below-average debt protection metrics
The domestic telecom industry has been through a roller coaster ride over the past few years. The price war, which started after Reliance Jio Infocomm Ltd ('CRISIL AAA/Stable/CRISIL A1+') launched its services, has eroded the industry's revenue. This, along with reduction in call termination charges, led to a significant decline in ARPU.
 
VIL reported an ARPU of Rs 88 for the quarter ended September 2018, the first quarter after the merger. Though measures, such as introduction of minimum recharge packs and recent tariff hikes have helped increase ARPU to Rs 109 in the quarter ended December 2019. But the company has also seen significant loss of more than 8 crore subscribers over the 12 months through December 2019, which has moderated the growth in revenues and profitability.
 
The recent tariff hike by VIL with effect from December 3, 2019, is expected to improve profitability, assuming there will be no significant churn in subscribers, pricing discipline is maintained by telcos, and subscribers do not shift to lower price packs. However, the benefits will be more pronounced next fiscal, given the full-year impact of the tariff hike.
 
Operating performance is likely to remain moderate, though the quantum of synergy benefits, improvement in profitability, and materialisation of deleveraging plans will remain key rating sensitivity factors over the medium term.
 
* Exposure to technological changes and regulatory risks
New technology could necessitate fresh investments or an overhaul of the network. The advent of 4G, for instance, saw telcos investing substantially in upgrading infrastructure even before they could make significant returns on investments in 3G.
 
Further, the telecom industry is highly regulated. The government reduced call termination charges for domestic calls to 6 paisa from 14 paisa, and for international calls to 30 paisa from 53 paisa; which constrained profitability of large incumbent players.
 
However, TRAI has deferred the plan of reduction in interconnect usage charges (IUC) to zero per minute to January 1, 2021, earlier planned to be effective from January 1, 2020, which will be beneficial to VIL.
 
On November 8, 2019, TRAI had issued another consultation paper focused on review of the existing regulatory regime for international termination charges. The final outcome in this regard will continue to be monitored.
 
Furthermore, on December 17, 2019, TRAI floated a consultation paper with regards to requirement to fix floor pricing. TRAI has sought comments from various stakeholders on the issue, deadline for which is February 28, 2020.
 
Rating sensitivity factors
Upward factors
* Significant relief provided by the government on the AGR issue in terms of lower liability or deferment of liabilities
* Sustenance of debt to EBITDA ratio at below 7 times
* Sizeable financial support from the promoters, leading to better capital structure
 
Downward factors
* Debt to EBITDA ratio remaining above 10 times
* Further weakening of the operating performance, constraining cash accrual
* No relief by the government regarding the AGR issue, impacting liquidity
Liquidity Poor

VIL had cash and cash equivalents of Rs 12,530 crore as on December 31, 2019, against deferred spectrum repayment of about Rs 3,000 crore in the quarter ended March 2020. However, payout towards the AGR liability could significantly impact liquidity. Besides, delay in planned monetisation of assets might further stretch liquidity. Any accelerated debt servicing payments, triggered by the breach of debt covenants, may also constrain liquidity.

About the Company

VIL is one of the leading mobile service providers in India. It operates in all 22 service areas in the country.
 
Vodafone and Aditya Birla Group (ABG) owned 44.39% and 27.18% stake, respectively, on a fully diluted basis in VIL, as on December 31, 2019. Vodafone is a globally renowned international mobile communications conglomerate with operations in 25 countries, over 65 crore customers, and more than 41 partner networks. ABG is a large Indian conglomerate with operations in 34 countries across 5 continents.
 
Net loss was Rs 6,438 crore in the quarter ended December 31, 2019, driven by accounting for AGR liability, reversal of deferred tax assets recognised earlier, and accelerated depreciation on certain assets.

Key Financial Indicators - pro-forma Vodafone Idea Ltd
As on / for the period ended March 31   2019 2018
Revenue Rs crore 48,747 63,138
Profit after tax (PAT) Rs crore -13,371 -12,285
PAT margin % -27.4 -19.4
Debt/EBITDA Times 23.1 10.3
Adjusted interest coverage Times 0.49 1.25

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate Maturity date Issue size (Rs crore) Rating assigned with outlook
INE713G08046 Debentures 12.06.15 8.25% 10-Jul-20 3,500.00 CRISIL B+/Watch Negative
 
Annexure - List of entities consolidated
Names of entities consolidated Extent of consolidation Rationale for consolidation
Idea Cellular Services Ltd Fully consolidated Strong financial and business linkages
Idea Telesystems Ltd Fully consolidated Strong financial and business linkages
You Broadband India Ltd Fully consolidated Strong financial and business linkages
You System Integration Private Ltd Fully consolidated Strong financial and business linkages
Vodafone Business Services Ltd Fully consolidated Strong financial and business linkages
Mobile Commerce Solutions Ltd Fully consolidated Strong financial and business linkages
Vodafone Towers Ltd Fully consolidated Strong financial and business linkages
Vodafone Foundation Fully consolidated Strong financial and business linkages
Vodafone Technology Solutions Ltd Fully consolidated Strong financial and business linkages
Vodafone m-pesa Ltd Fully consolidated Strong financial and business linkages
Vodafone India Ventures Ltd Fully consolidated Strong financial and business linkages
Vodafone India Digital Ltd Fully consolidated Strong financial and business linkages
Connect (India) Mobile Technologies Pvt Ltd Fully consolidated Strong financial and business linkages
Aditya Birla Idea Payments Bank Ltd Equity method Proportionate consolidation
Indus Towers Ltd Equity method Proportionate consolidation
Firefly Networks Ltd Equity method Proportionate consolidation
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST    --    --  18-01-19  Withdrawal  28-11-18  CRISIL A1+    --  -- 
Non Convertible Debentures  LT  3500.00
19-02-20  		CRISIL B+/(Watch) Negative  24-01-20  CRISIL BB/Watch Negative  22-11-19  CRISIL BBB-/Watch Negative  28-11-18  CRISIL A+/Negative    --  -- 
            01-11-19  CRISIL BBB+/Watch Negative           
            06-08-19  CRISIL A/Negative           
            18-01-19  CRISIL A+/Negative           
Short Term Debt  ST                      CRISIL A1+ 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Mobile Telephony Services
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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