It seems investor confidence in debt-laden Vodafone Idea has taken a hit. Ahead of its follow-on public offering, which opens on Thursday, the telecom operator’s shares fell over 4% in intraday trading on BSE on Tuesday. Markets were closed on Wednesday on account of Ram Navami.

A follow-on public offering, or FPO, is where an existing public company issues shares to raise additional capital.

While a fundraising announcement is generally received positively, in Vodafone Idea’s case, market sentiment is down despite consistent backing from promoter Aditya Birla Group as well as the government. Vodafone Idea, or Vi, is a partnership between the Aditya Birla Group and Vodafone Group.

On the face of it, it seems the market is not too bullish on Vi’s prospects of managing its mounting debt, quarterly losses and sluggish subscriber growth.

Interestingly, market sentiment was similar when the firm announced its plan to raise Rs 45,000 crore through a mix of debt and equity in February—the FPO is part of this plan. The stock plunged 14%. There was market consensus that the fundraise would have a limited impact on the company’s financials and debt.

Simply put, Vi’s lack of competitiveness is glaringly apparent to investors.

Before we look at the caution surrounding Vi, let’s understand the specifics of the offering.

About the FPO: The offer—set to open for subscription from 18 April to 22 April—aims to raise Rs 18,000 crore. The price band for the issue has been fixed at Rs 10-11 per share, which is a discount compared to the fundraise earlier this month, where Aditya Birla Group infused Rs 2,075 crore through a preferential issue at Rs 14.87 per share. The infusion came at a critical juncture for Vi; Aditya Birla Group chairman Kumar Mangalam Birla had said in February that efforts were being made to bring in external investors.

If successful, Vi plans to spend Rs 12,750 crore of the Rs 18,000 crore towards expansion of the company’s network infrastructure, including 4G and 5G services. An additional Rs 2,175 crore will be allocated for clearing certain deferred payments for spectrum to the Department of Telecommunications and the goods and services tax, while the remainder will be used for general corporate purposes.

The FPO is a fresh issue of shares. Half of this has been reserved for qualified institutional buyers, 15% for non-institutional investors and the remaining 35% for retail investors.

The company has already raised about Rs 5,400 crore for the FPO from 74 anchor investors, including GQG Partners, Fidelity Investments, UBS, Morgan Stanley Investment Management, Quant and Motilal Oswal. Anchor investors, typically institutional buyers, commit to buying shares offered in an IPO or FPO upfront, before the offering is opened to the public. The highest number of shares was allocated to GQG Partners—26%.

This is where the question around Vi’s competitiveness comes into play. Analysts are not too keen on the issue and have even recommended avoiding it altogether because of the company’s consistent losses and cash burn. They believe it may not be a great bet in comparison with peers Reliance Jio and Bharti Airtel.

Look before you leap: Vi reported a loss of Rs 6,986 crore in the quarter ended 31 December 2023, while debt stood at Rs 2.15 lakh crore as of December-end, including deferred spectrum payment obligations of Rs 1.38 lakh crore to the government. Cash and cash equivalents during the quarter were a mere Rs 318.9 crore in comparison.

It has not done so well on subscriber metrics either. The company has lagged behind competitors Jio and Airtel in rolling out extensive 4G and 5G services and that seems to have cost it many subscribers. It lost over 1.36 million subscribers in the month of December, while Jio and Bharti Airtel gained 3.99 million and 1.85 million, respectively. Since the merger of Vodafone and Idea, the company has lost 19% of its market share due to insufficient investment in its network.

And it seems Vi seems to be well aware of the problem. In its red herring prospectus, it has acknowledged that failure to keep up with evolving consumer preferences and technological advancements is a challenge and could hit competitiveness and financial performance. Vi also plans to use 70% of the total fundraise to strengthen its 4G and 5G services to bring itself on a par with Jio and Airtel.

To fathom the challenge before Vi, consider its bloated equity capital base of nearly Rs 50,000 crore that gets depleted through losses year after year. Contrast this with the lean equity capital base of Airtel, which is both profitable and cash flow-positive, that is under Rs 3,000 crore. The FPO will only add to the denominator, while the numerator—its profitability—remains a pie in the 5G sky. Equity capital is the amount raised by a company by issuing stocks to investors, granting ownership stakes.

Already a few steps behind and losing ground, the telecom operator really needs the money that the FPO can bring. Analysts believe the fundraise can significantly help the company improve its network and catch up with rivals in terms of 4G and 5G coverage.

“Combined with potential tariff hikes after elections and the possibility of AGR [adjusted gross revenue] relief (matter pending in Supreme Court), this should significantly boost VIL’s cash flow position,” Citi Research said in a note. Telecom operators are mandated to share a portion of their AGR with the government. Airtel and Vi have filed pleas before the court seeking rectification of how much they owe the government, claiming that the telecom department's calculation of AGR dues has arithmetical errors. The AGR case is crucial for Vi because its dues now amount to over Rs 50,000 crore—a significant drain on its coffers.

Citi analysts also believe that Vi's future depends on whether the government decides to convert some of its dues (AGR and spectrum repayment) into equity: “...this [conversion of dues into equity] remains a key uncertainty from both a cash flow and an equity dilution perspective, and we await further developments.”

It’s worth noting that the government has extended much support to Vi, initially by bailing it out and now by backing the FPO. In February last year, the government became the single-largest shareholder in the loss-making business after it chose to convert the company’s Rs 16,133 crore worth of dues into a 33.4% stake. (For more context, read: Government’s 33% stake may not save Vodafone Idea.)

The government supports the FPO, with finance secretary T.V. Somanathan emphasizing the need to maintain competition in the telecom market. Which is fair. Vi’s survival is crucial for maintaining healthy competition and potentially preventing tariff hikes—a duopoly in the industry could lead to increased tariffs between the two; having a third player helps consumers with an additional choice.

But Vi has too much ground to cover compared with Jio and Airtel’s strides in the home segment with their fixed wireless broadband services (Airfiber) and content proposition.

For Vi, the FPO matters as it has big plans that rely on its success. It is eyeing the rollout of 5G services in specific regions within the next six-nine months and plans to engage with lenders “more seriously” once the cash rolls in. However, attempting to gain ground in an industry where telecom giants Jio and Airtel hold market shares of 39.69% and 32.95%, respectively, (as against Vi’s modest 19.25%)—while wrestling mammoth debt and the urgent need to boost network infrastructure—will be an uphill struggle.

(With inputs from Ujval Nanavati)