Vodafone Idea Ltd. – “What I …

“What if” enables to build all possible scenarios, thereby enabling us to take usually an unbiased view when it comes to taking any decision, including investing or lending. Had the bankers and Fund Managers asked some of these rudimentary What if questions, they would have obviously not been staring at loss of USD 15.31 billion having lent to or invested in Vodafone Idea Ltd.

This is in light of the recent Supreme Court’s ruling around Adjusted Gross Revenue, resulting in additional statutory dues worth more than USD 6.2 bln to be paid by VIL in less than 3 months from now.

Just to give you a background, VIL came out with the largest rights issues by a corporate in India approximating to USD 3.6 billion at the price of INR 12.50 per share in the first quarter of this year. The INR 10 per share has now vanished, the company is now available at INR 2.50 per share. (80% erosion of market value in 8 months!! 10% erosion per month)

While I had written about Vodafone Idea: “What If” in April, and had asked the following What if questions:

1. Outstanding litigation including regulatory or statutory action, disputes around direct and indirect tax, against the company and its promoters stands at USD 16.42 billion. What if 5% of the outstanding litigation were to materialize every year?
2. The company has been incurring losses over the last 2 years, loss for the 9-month ended December 31, 2018 was INR 97.22 billion (~USD 1.42 billion). What if the losses were to continue for a little longer, may be 2 to 3 years more? The company clearly acknowledged increasing intensity of competition, licenses and spectrum allocations subject to government approval, inability to acquire spectrum at reasonable prices.
3. What if some covenants under the company’s financial agreements get breached? Well, it’s happened in the past, however, the company was been able to obtain waivers. What if the company is not able to obtain waivers on a go-forward basis?
4. The company has been having negative cash flows over some number of years. Negative free cash flows combined with debt of USD 15.31 billion would not leave any cash for the equity shareholders, leave alone dividends aside. What if the company were to incur additional capex? Well, it’s a given!!
5. The combined entity of Vodafone and Idea provided an estimated synergy cost savings of USD 438 mln per year. What if the synergies don’t come through?

As Charlie Munger says, “People are trying to be smart – all I am trying to do is not to be idiotic, but it’s harder than most people think.”

Disclaimer: Please note that these are my personal views. While, I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.