Rating Rationale
January 18, 2019 | Mumbai
Vodafone Idea Limited
Long-term rating reaffirmed; CP withdrawn 
 
Rating Action
Rs.6000 Crore Non Convertible Debentures CRISIL A+/Negative (Reaffirmed)
Rs.2000 Crore Commercial Paper CRISIL A1+ (Withdrawn)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A+/Negative' rating on the non-convertible debentures (NCDs) of Vodafone Idea Limited (Voda-Idea). CRISIL has also withdrawn its rating on the commercial paper programme of Voda-Idea at the company's request as there is nil outstanding against the facility. The withdrawal is in-line with CRISIL's withdrawal policy.

On November 28, 2018, following the amalgamation of Vodafone India Ltd (VIL) and Vodafone Mobile Services Ltd (VMSL) into Voda-Idea and on receipt of the letter of novation from Voda-Idea, CRISIL had migrated the ratings on the Rs 6,000 crore NCDs and Rs 2,000 crore CP of VMSL to Voda-Idea.

Further, CRISIL had downgraded and withdrawn its rating on the long-term bank facilities and NCDs of VMSL to 'CRISIL A+/Negative' from 'CRISIL AA-/Negative' on November 28, 2018. The downgrade reflects continued pricing pressure in the mobile telephone service industry, leading to weak operating performance of Voda-Idea. The company reported pro-forma earnings before interest, tax, depreciation, and amortisation (EBITDA) of Rs 2,349 crore for the first half of fiscal 2019, against a pro-forma EBITDA of Rs 11,908 crore for the full year of fiscal 2018. Synergy benefits of the merger are expected to improve the EBITDA over the medium term. The timely realisation of synergy benefits will be a key monitorable.

Net debt remained high at Rs 1.12 lakh crore as on September 30, 2018. Voda-Idea has announced plans to raise equity up to Rs 25,000 crore in fiscal 2019, out of which the sponsors, Vodafone Group Plc (Vodafone; rated 'BBB+/Negative/A-2' by S&P Global Ratings) and the Aditya Birla group (ABG), will contribute up to Rs 11,000 crore and up to Rs 7,250 crore, respectively. CRISIL expects net debt to remain over Rs 85,000 crore by the end of fiscal 2019.

CRISIL believes the credit risk profile of the combined entity will continue to be affected by competition, while the quantum and timeliness of synergy benefits will be key rating sensitivity factors. Moreover, support provided to the combined entity by its sponsors, Vodafone and ABG, will remain a key monitorable.

The ratings reflect strong market position in the mobile telephone segment in India and support from strong sponsors. These strengths are partially offset by modest debt protection metrics and exposure to regulatory changes and technological risks.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Voda-Idea and its subsidiaries, as all the entities, collectively referred to as Voda-Idea, operate in the same business and have a common management.

Please refer Annexure - Details of consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Strong market position in the mobile telephone segment in India
After the amalgamation, Voda-Idea has emerged as the largest mobile operator in India. It has leading revenue market share (30.9% for the quarter ended September 30, 2018), subscriber market share (36.5% as on August 31, 2018) and spectrum holdings (1,850 MHz spread across the 2G, 3G, and 4G bands). It has the capability to provide wireless broadband services across all 22 circles in India, and the quantum of spectrum available provides a cushion to handle future requirement. The ability to seamlessly transition to a single brand, while maintaining the market position, will remain a key monitorable.

* Support from strong sponsors
Voda-Idea has the backing of, and has received robust support from, strong sponsors, Vodafone and ABG, which exercise equal management control. Before completion of the merger, Vodafone brought in equity of Rs 8,600 crore into VIL while ABG brought in Rs 3,250 crore in ICL. Further, Rs 3,500 crore was raised by ICL through a qualified institutional placement in February 2018. In November 2018, Voda-Idea announced plans to raise equity up to Rs 25,000 crore in fiscal 2019, out of which Vodafone and ABG will contribute up to Rs 11,000 crore and up to Rs 7,250 crore, respectively. The presence of strong sponsors also aids financial flexibility and the ability to raise funds. CRISIL will continue to closely monitor the support from both the sponsors.

Weaknesses:
* Modest debt protection metrics
The domestic telecom industry is witnessing intense price competition, after Reliance Jio Infocomm Ltd ('CRISIL AAA(SO)/CRISIL AAA/Stable/CRISIL A1+') launched its services. Average revenue per user (ARPU) per month declined to Rs 88 for Voda-Idea for the quarter ended September 30, 2018, from Rs 145 and Rs 132 for VIL and ICL, respectively, for the corresponding period of the previous fiscal. This led the operating margin of the combined entity to decrease significantly to 9.4% during the first six months of fiscal 2019 from 18% in fiscal 2018 on a pro-forma basis. The fall in operating performance has weakened debt protection metrics, with gross debt to EBITDA ratio remaining around 10 times and interest coverage remaining below 1.3 times for fiscal 2018.

Though significant synergy benefits are expected over the medium term, thereby supporting the operating performance of the combined entity, debt protection metrics will remain weak. Quantum of synergy benefits and improvement in profitability as well as debt protection metrics remain key rating sensitivity factors.

* Exposure to technological changes and regulatory risks
The telecom industry remains susceptible to regulatory and technological changes. New technology could necessitate fresh investment or an overhaul of network. Advent of 4G, for instance, has seen operators investing substantially in upgrading infrastructure even before they had made significant returns on investments in 3G.
 
The telecom industry is a highly regulated market, and therefore, players are vulnerable to changes in regulations. The government reduced termination charges for domestic and international calls from 14 paise and 53 paise, respectively, to 6 paise and 30 paise, respectively, and this adversely impacted profitability of large incumbent players.
Outlook: Negative

CRISIL believes Voda-Idea's credit risk profile may be further impacted by continued competition, while the quantum and timeliness of synergy benefits will be key monitorables.

Downside scenario
* Lower-than-expected synergy benefits, or weakening of operating performance constraining cash accrual
* Substantial capital expenditure arising from technological changes or spectrum acquisition, impacting debt protection metrics
* Lower-than-expected deleveraging of the balance sheet

Upside scenario
* More-than-expected reduction in leverage, led by increase in cash accrual and timely execution of deleveraging plans
* Improvement in the business risk profile, driven by greater subscriber share and ARPU

Liquidity
Voda-Idea has strong liquidity, marked by liquid surplus of Rs 13,551 crore as on September 30, 2018, against principal repayment of Rs 9,641 crore over the 18 months through March 31, 2020. A large part of the liquid surplus is likely to be unencumbered. Cash accruals are expected to improve only gradually while capex requirement will remain at Rs 13,000-15,000 crore per annum. Liquidity further remains supported by the planned equity infusion and lean working capital cycle.

About the Company

Voda-Idea is the largest mobile service provider in India with the largest market share in terms of revenue, subscribers, and spectrum holdings. It operates in all 22 service areas in the country.

Vodafone owns 45.2% stake and ABG owns 26% stake on a fully diluted basis in Voda-Idea.

Vodafone is a globally renowned international mobile communications conglomerate with operations in 26 countries, over 46 crore customers, and more than 48 partner networks. ABG is a large Indian conglomerate with operations in 36 countries.

Key Financial Indicators (Pro-forma Vodafone Idea Ltd)
As on/for the period ended March 31 Unit 2018 2017
Revenue Rs crore 63,161 78,748
Profit After Tax (PAT) Rs crore -12,250 -2,879
PAT Margin % -19.4 -3.7
Debt/EBITDA Times 9.9 5.5
Interest coverage Times 1.16 1.91

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.Cr) Rating assigned with outlook
NA Commercial Paper NA NA 7-365 days 2000.00 Withdrawn
INE713G08038 Debentures 12.06.15 8.15% 10-Jul-19 2500.00 CRISIL A+/Negative
INE713G08046 Debentures 12.06.15 8.25% 10-Jul-20 3500.00 CRISIL A+/Negative
 
Annexure - Details of Consolidation
Subsidiary Companies
Idea Cellular Services Limited
Idea Telesystems Limited
You Broadband India Limited
You System Integration Private Limited
Vodafone Business Services Limited
Mobile Commerce Solutions Limited
Vodafone Towers Limited
Vodafone Foundation
Vodafone Technology Solutions Limited
Vodafone m-pesa Limited
Vodafone India Ventures Limited
Vodafone India Digital Limited
Connect (India) Mobile Technologies Private Limited
 
Associate Companies
Aditya Birla Idea Payments Bank Limited
 
Joint Ventures
Indus Towers Limited
Firefly Networks Limited
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  2000.00  Withdrawn      28-11-18  CRISIL A1+    --    --  -- 
Non Convertible Debentures  LT  6000.00
18-01-19 		 CRISIL A+/Negative      28-11-18  CRISIL A+/Negative    --    --  -- 
Short Term Debt  ST    --    --    --    --  14-11-16  Withdrawal  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

For further information contact:
Media Relations
 Analytical Contacts
 Customer Service Helpdesk
Saman Khan
Media Relations
CRISIL Limited
D: +91 22 3342 3895
B: +91 22 3342 3000
saman.khan@crisil.com

Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com

Vinay Rajani
Media Relations
CRISIL Limited
D: +91 22 3342 1835
M: +91 91 676 42913
B: +91 22 3342 3000
vinay.rajani@ext-crisil.com

 Sachin Gupta
Senior Director - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 3023
Sachin.Gupta@crisil.com

Nitesh Jain
Director - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 3329
nitesh.jain@crisil.com

Rakshit Kachhal
Rating Analyst - CRISIL Ratings
CRISIL Limited
D:+91 124 672 2111
Rakshit.Kachhal@crisil.com 		Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com

 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. However, CRISIL alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Limited

CRISIL is a leading agile and innovative, global analytics company driven by its mission of making markets function better. We are India’s foremost provider of ratings, data, research, analytics and solutions. A strong track record of growth, culture of innovation and global footprint sets us apart. We have delivered independent opinions, actionable insights, and efficient solutions to over 1,00,000 customers.
 
We are majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.
 
For more information, visit www.crisil.com 

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 1,10,000 MSMEs have been rated by us.

CRISIL PRIVACY
 
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service your account and to provide you with additional information from CRISIL.For further information on CRISIL’s privacy policy please visit www.crisil.com.

DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale that we provide (each a “Report”). For the avoidance of doubt, the term “Report” includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL providing or intending to provide any services in jurisdictions where CRISIL does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Rating are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL assumes no obligation to update its opinions following publication in any form or format although CRISIL may disseminate its opinions and analysis. CRISIL rating contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way.CRISIL or its associates may have other commercial transactions with the company/entity.

Neither CRISIL nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, “CRISIL Parties”) guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL’s public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about CRISIL ratings are available here: www.crisilratings.com.

CRISIL and its affiliates do not act as a fiduciary. While CRISIL has obtained information from sources it believes to be reliable, CRISIL does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of the respective activity. As a result, certain business units of CRISIL may have information that is not available to other CRISIL business units. CRISIL has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html

CRISIL’s rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL.

All rights reserved @ CRISIL