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Vodafone Idea plans $3.8 billion capital spend to expand network

But ballooning debt, competition from Reliance Jio add to investor concerns

Vodafone Idea plans to raise nearly 250 billion rupees through a rights issue in January-March to pare down a part of its obligations.    © Reuters

MUMBAI (NewsRise) -- Vodafone Idea, India's largest mobile phone operator, plans to spend 270 billion rupees ($3.8 billion) until March 2020 to expand its high-speed network, but mounting losses and ballooning debt raise investor concerns.

Vodafone Idea, formed after the U.K.'s Vodafone merged its Indian operations with Idea Cellular in August, said in an investor presentation that it plans to extend its fourth generation internet service coverage to 80% by March 2020, with a more than two-fold jump in network capacity.

The capital expenditure plan comes at a time when the Indian telecom industry is witnessing a brutal price war unleashed by billionaire Mukesh Ambani's Reliance Jio Infocomm, which entered the market about two years ago. Second-ranked Bharti Airtel aims to spend $4 billion this fiscal year alone to fend off competition from Jio, which has pumped in more than $30 billion in the fastest-growing telecom market in the world.

Vodafone Idea, saddled with a debt of 1.13 trillion rupees, plans to raise nearly 250 billion rupees through a rights issue in January-March to pare down a part of its obligations. Kumar Mangalam Birla, the billionaire founder of Idea Cellular and Aditya Birla Group, and Vodafone Group will contribute nearly 110 billion rupees to the issue.

The company is also looking to sell its 11.2% stake in Indus Towers, its joint venture with Bharti Airtel.

If the funding goes through, then along with current cash of about 136 billion rupees and potential tower stake sale worth 50 billion rupees, the overall cash in the company could be 440 billion rupees, brokerage Motilal Oswal said in a note on Thursday. "This could support the capital expenditure and the interest paying capability of 10-12 quarters of requirement."

Meanwhile, the current debt level raises concerns among investors about the company's ability to make more capital investments, especially when losses are mounting. About 79% of Vodafone Idea's debt is related to the cost of telecom spectrum, Motilal Oswal said.

Last week, the company posted its first quarterly result since the merger, pointing to severe pressure to its operating earnings and cash flow. For the quarter ended in September, Vodafone Idea saw after-tax losses worth about 50 billion rupees.

Meanwhile, Jio posted a fourth straight quarter of profit in July-September, adding more users and revenue at a sustained pace.

According to media reports, Vodafone Idea's Chairman Birla recently met with India's telecom minister and other government officials and raised concerns over the severe cash crunch in the telecom sector and high spectrum payments. Birla's key demands included extending the period of payment of spectrum costs to 18 years from 16 now.

To be sure, the company is relying on the synergies of the merger to help cut down its operating and capital costs. In its presentation on Wednesday, Vodafone Idea said it expects synergies worth 140 billion rupees to start flowing in the fiscal year 2021 from an earlier target of the fiscal year 2023.

Shares of Vodafone Idea lost almost 18% in Mumbai trading since the completion of merger in August. On Thursday, the shares lost 7.4%, while the benchmark S&P BSE Sensex closed 0.6% lower. Bharti Airtel fell 1.2% amid concerns about a further drop in the profitability of Indian telecom operators as they draw near a January 2020 deadline when interconnection fee paid by mobile phone companies will come to an end.

According to Kotak Institutional Equities, as much as 30% of the combined operating earnings of Vodafone Idea and Bharti Airtel reported in July-September accounted for interconnect fees.

"This operating earnings will go down to zero from January 1, 2020," the brokerage said.

--Dhanya Ann Thoppil

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