Rating Rationale
January 24, 2020 | Mumbai
Vodafone Idea Limited
Rating downgraded to 'CRISIL BB'; Continues on 'Watch Negative'   
 
Rating Action
Rs.3500 Crore Non Convertible Debentures CRISIL BB (Downgraded from 'CRISIL BBB-'; 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 BB' from 'CRISIL BBB-'. The rating continues to be on 'Rating Watch with Negative Implications'.
 
The rating action reflects CRISIL's expectation of a significant deterioration in VIL's financial risk profile on account of the potential payout against the adjusted gross revenue (AGR)-related liability, to be payable shortly. This is despite CRISIL's expectation that the actual payment towards the AGR-related liability could be lower than the Rs 44,150 crore amount that has been provided for by the company. Moreover, CRISIL believes there could be some relief from the Department of Telecommunications (DoT) in the form of deferment of timelines for payment of these liabilities. CRISIL further expects the sponsors to provide financial support in case a significant relief, in terms of amount and timelines, is provided.
 
The review petition, which was filed by telecommunication companies (telcos), including VIL, regarding the AGR issue, has been dismissed by the Supreme Court (SC) on January 16, 2020, post which, they have filed an appeal to the SC for modification of the order dated, October 24, 2019. The hearing of the same is scheduled to happen next week. On January 23, 2020, the DoT issued a letter stating that no coercive action will be taken against telecom service providers for non-compliance of payment of AGR-related dues until further notice.
 
The rating remains on negative watch pending clarity on the outcome of the hearing of the appeal for modification of the order; payments for the spectrum usage charges; further relief, if any, to be provided by the government; and the funding mix of the final payment towards the DoT. CRISIL will remove the rating from negative watch and take a final rating action once there is clarity on these issues.
 
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 15,390 crore as on September 30, 2019) will be insufficient if there is a payout of licence fee liability of Rs 27,610 crore.
 
Operating performance continues to be weak. Earnings before interest, tax, depreciation, and amortisation (EBITDA) was Rs 1,050 crore in the second quarter of fiscal 2020, a sequential decline of Rs 200 crore over the quarter ended June 30, 2019. Furthermore, 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.
 
The recent industry-wide tariff hike could support the company's EBITDA, if pricing discipline is maintained by telcos and there is no significant churn in subscribers. However, the benefits will be more pronounced next fiscal, given the full-year impact of the tariff hike.
 
Despite the hike in tariffs, debt protection metrics are expected to remain weak on account of potential payout against the AGR-related dispute, and delay in planned monetisation of assets. 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 and support from strong sponsors. 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.

Please refer Annexure - List of entities consolidated, 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
After the 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 1,850 megahertz (MHz), of which around 1,715 MHz can be utilised for deploying any technology'2G, 3G, 4G, or 5G. The group has been providing wireless voice and broadband services across all 22 circles in India, and the quantum of spectrum available provides a cushion to handle future requirement.
 
As of September 2019, the group has already completed network integration in 14 circles. The ability to seamlessly transition to a unified network while sustaining market position will be a key rating sensitivity factor.
 
Weaknesses
* Continued weak 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, have increased ARPU to Rs 108 for the quarter ended June 2019, it again declined marginally to Rs 107 for the next quarter. Besides, the company has also seen significant loss of more than 11 crore subscribers over the 12 months through September 2019. As a result, revenue and operating profit were lower by Rs 426 crore and Rs 200 crore, respectively, in the quarter ended September 30, 2019, compared with the previous quarter.
 
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.
 
Furthermore, telecom is a highly regulated market. 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, the TRAI has deferred the plan of reduction in IUC (also called interconnect usage charges) to zero paisa 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 has 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.
Liquidity Stretched

Though the group had cash and cash equivalent of Rs 15,390 crore as on September 30, 2019, against deferred spectrum repayment of Rs 5,630 crore (including principal and interest) and external debt repayment of Rs 945 crore in the second-half of fiscal 2020, any payout towards the AGR liability could significantly impact liquidity. Existing liquid resources are insufficient if there is a payout of licence fees liability of Rs 27,610 crore. 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.

Rating Sensitivity factors
Upward factors:
* Favourable outcome of the AGR issue by the SC and the DoT, resulting in higher-than-expected relief in terms of lower liability or deferment of the liabilities
* Sustenance of debt to EBITDA ratio at below 7 times
* Significant financial support from 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
* Lower-than-required relief, regarding the AGR issue, impacting 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 ABG owned 44.39% and 27.18% stake, respectively, on a fully diluted basis in VIL, as on September 30, 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 50,922 crore in the quarter ended September 30, 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-Jun-15 8.25% 10-Jul-20 3,500.00 CRISIL BB/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
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

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

 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

Rounak Agarwal
Rating Analyst - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 4162
ROUNAK.AGARWAL@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