Rating Rationale
May 22, 2020 | Mumbai
Vodafone Idea Limited
Rating continues on 'Watch Negative'    
 
Rating Action
Rs.3500 Crore Non Convertible Debentures CRISIL B+ (Continues on 'Rating Watch with Negative Implications') 
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL's rating on Rs.3500 crore non-convertible debentures of Vodafone Idea Limited (VIL) continues to be on 'Rating Watch with Negative Implications.
 
The rating remains on 'Watch with Negative Implications' pending clarity over adjusted gross revenue (AGR) liabilities to be paid by VIL, funding plan for clearing the dues, and deferment of liabilities, if granted, by the Supreme Court (SC). CRISIL will remove the rating from negative watch and take a final rating action once there is clarity on these issues.
 
As per SC's directive dated March 18, 2020, telecommunication companies (telcos) should not be allowed to do self-assessment of AGR liabilities and should pay the initial amount that was placed before the court, including interest and penalty. Therefore, clarity over the final amount to be paid is still pending. The SC hearing for deferment of payment was scheduled for the first week of April; however, it got postponed on account of the Covid-19 outbreak, and hence, will be a key monitorable.
 
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) as on September 30, 2019, for the disputed liability towards AGR. However, VIL has paid the principal amount of Rs 6,854 crore (as per their self-assessment) till March 16, 2020, to the Department of Telecommunications (DoT) towards AGR dues. The actual amount payable could be much higher than the aforementioned amounts, thereby enhancing the risk of invocation of bank guarantees provided by the company towards AGR dues to DoT. This will weaken VIL's financial risk profile significantly.
 
Operating performance continues to be modest compared with peers. Earnings before interest, taxes, depreciation, and amortisation (EBITDA) were Rs 1,284 crore in the third quarter of fiscal 2020, an increase of Rs 230 crore over the quarter ended September 30, 2019. Furthermore, as per the Telecom Regulatory Authority of India (TRAI), the company lost 8.6 crore subscribers over the 12 months through January 2020. Continued subscriber loss has negated the benefits of higher average revenue per user (ARPU) and synergy.
 
Despite increase in tariffs, debt protection metrics are likely to remain weak on account of the likely payout against the AGR-related dispute and delay in the monetisation of assets. Accordingly, net debt to EBITDA ratio and interest coverage are estimated above 20 times and below 1 time, respectively, in fiscal 2020.
 
The rating continues to reflect weak operating performance, leading to modest debt protection metrics, and susceptibility to regulatory changes and technological risks. These weaknesses are partially offset by VIL's established position in the mobile services segment in India. The rating also factors in the moratorium availed by VIL on the bank facilities in accordance with the relief measures announced by the Reserve Bank of India on March 27, 2020.

Analytical Approach

CRISIL has combined the business and financial risk profiles of VIL and its subsidiaries, collectively referred to as VIL, as they operate in the same business and have common management.

Refer to annexure - Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Weaknesses
* Modest operating performance leading to below-average debt protection metrics
India's telecommunication industry has been on a roller coaster ride over the past few years. The price war that 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 ARPU of Rs 88 for the quarter ended September 30, 2018, the first quarter after the merger. Measures such as introduction of minimum recharge packs and higher tariff helped increase ARPU to Rs 109 in the quarter ended December 31, 2019. However, the company lost more than 8.6 crore subscribers over the 12 months through January 2020, leading to moderate revenue growth and profitability.
 
The increase in tariff with effect from December 3, 2019, should improve profitability, assuming there is no significant churn in subscribers, pricing discipline is maintained by telcos, and subscribers do not shift to lower price packs. However, the improvement will be more pronounced in the next fiscal, given the impact of increased tariff for an entire year.
 
Operating performance is likely to remain modest over the medium term, and the quantum of synergy benefits, improvement in profitability, and materialisation of deleveraging plans will be key monitorables.
 
* Exposure to technological changes and regulatory risks
New technology could necessitate fresh investment 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 return on investment on 3G.
 
Moreover, the telecommunication industry is highly regulated. TRAI reduced call termination charges for domestic calls to 6 paisa from 14 paisa and for international calls to 30 paisa from 53 paisa, constraining profitability of large incumbent players.
 
However, TRAI had deferred the plan to reduce interconnect usage charges to Rs 0 per minute to January 1, 2021, earlier planned from January 1, 2020, which will be beneficial to VIL.
 
On November 8, 2019, and December 17, 2019, TRAI had issued consultation papers focused on review of the existing regulatory regime for international termination charges and requirement to fix floor pricing, respectively. The final outcome will be a key monitorable. 
 
Strength
* Established market position in the mobile services segment in India
Post-merger with Idea Cellular Ltd, VIL has emerged as a significant mobile operator in India. It had a gross revenue market share of 29.1% as on September 30, 2019 (excluding National Long Distance and International Long Distance revenue), subscriber market share of 28.4% as on January 31, 2020, and spectrum holdings of 1,846 MHz, of which 1,724 MHz can be utilised for deploying any technology, 2G, 3G, 4G, or 5G. VIL provides wireless voice and broadband services across all 22 circles in the country, and the quantum of spectrum available provides the ability to handle future requirement.
 
As of January 2020, VIL has completed network integration in 17 circles. The ability to seamlessly transition to a unified network while sustaining market position will be a key monitorable.
Liquidity Poor

Cash and equivalent is expected to reduce to around Rs 4,000-4,500 crore as on March 31, 2020, from Rs 12,530 crore as on December 31, 2019, because of payment of principal amount towards AGR dues. However, liquidity will weaken further if there is a higher payout towards the AGR liability in the near term. Besides, delay in planned monetisation of assets may further stretch liquidity. Any accelerated debt obligation, triggered by the breach of debt covenants, will also constrain liquidity.

Rating Sensitivity factors
Upward Factors
* Significant relief provided to telcos on AGR dues 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 above 10 times
* Further weakening of the operating performance, constraining cash accrual
* No relief provided to teclos regarding AGR dues, weakening liquidity.
About the Company

VIL is a leading mobile service provider in India. It operates in all 22 service areas in the country.
 
Vodafone and the 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 as on 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 VIL)
As on/for the period ended March 31 Unit 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 3500.00 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
22-05-20  		CRISIL B+/(Watch) Negative  19-02-20  CRISIL B+/Watch Negative  22-11-19  CRISIL BBB-/Watch Negative  28-11-18  CRISIL A+/Negative    --  -- 
        24-01-20  CRISIL BB/Watch 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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