Vodafone Idea CEO Exclusive: Eyeing OTT Wave For ARPU Boost

Assessing existing average revenue per user levels, an important metric to check the health of a telecom player, is important before implementing any rate adjustments, according to Akshaya Moondra, chief executive officer of Vodafone Idea Ltd. He added that there are three ways in which the company is looking to increase their revenue and this includes tapping the thriving OTT (over-the-top) market in India.

In an exclusive interaction with NDTV Profit's Sajeet Manghat, Moondra emphasised on the potential 20–25% increase in tariffs adding that the significant difference between the present ARPU and the threshold needed for profitable returns.

Moondra's methodical approach reflects a deliberate approach; a rigorous review prior to enacting any tariff modifications, and Vodafone Idea's commitment to long-term expansion.

Here is an edited excerpt from the interview:

Sajeet Manghat: How do you plan to utilise the Rs 18,000 crore raised through the FPO?

Akshaya Moondra: We have detailed this in our red herring prospectus or RHP. A total of Rs 12,750 crore will be used for capital expenditure, with approximately Rs 2,175 crore allocated to spectrum payments and the remaining amount for general corporate purposes.

Of the Rs 12,750 crore for capital expenditure, around Rs 7,000 crore will be used for 4G coverage expansion. The FPO is a part of our overall fundraising plans, which also includes Rs 2,075 crore from promoters and additional debt funding that we are discussing with banks. The aim is to have a fully funded plan for the capex needs going forward.

Sajeet Manghat: I understand that you are raising Rs 20,000 crore in equity and Rs 25,000 crore in debt in total. What would be the total capital expenditure that you are planning in the next three-to-four years?

Akshaya Moondra: While I'm not in a position to provide specific guidance on that, what I can say is that the total equity plus debt will be used solely for growth capex. Other obligations such as payments to vendors and the government will be covered by our internal cash generation. Therefore, the new funding is clearly intended for growth capital expenditure.

Sajeet Manghat: What assurance have you given to long-term investors like GQG, Fidelity, UBS, among others, as you raised funds from them ahead of the FPO?

Akshaya Moondra: One of the key factors that attracts investors to us is the government's significant stake in the company, both as a shareholder and the largest credit provider.

Given our situation and balance sheet challenges, government support will be crucial. I was pleased to see statements from both the Honorable Minister and the Finance Secretary, expressing support for a healthy competitive industry and endorsing the FPO.

We also explained to them the positives of investing in the telecom sector. We shared our story with them, and to summarise, here are a few key points:

Firstly, everyone is aware of the India growth story and its implications for various industries. India has a large, growing population, unlike many other countries. Every citizen is either a customer or a potential customer, which is a significant strength. Secondly, 4G penetration levels in India are at 66%, indicating substantial room for growth.

There are three ways we foresee improvement in ARPU. First, there can be corrections in tariffs, which is quite obvious. Second, subscribers can upgrade from 2G to 4G, or from lower-tier services to higher-tier services. This is particularly important for us, as 42% of our subscribers are still on 2G.

Thirdly, the telecom industry is evolving as the primary means of digitally distributing content. Major content providers, including all OTT (Over-the-Top) players, are increasingly using telco platforms for content delivery. This trend bodes well for the growth of ARPU among customers.

Looking at the industry structure, we now have three private players and a government operator, which is a favourable setup for the industry to yield returns. This is a significant change from when there were 10 operators.

As for Vodafone Idea, we have delivered strong performance following the reforms package announcement in September 2021.

Despite liquidity constraints and subscriber losses, we have increased our 4G subscribers for 10 consecutive quarters and our ARPU has also shown consistent growth. Our revenue and Ebitda trends are moving in the right direction.

The main challenges that prevent us from fully participating in the industry and continue to lose subscribers are the lack of 4G coverage and intense service competition. Our highest priority with the funding we are receiving will be to expand our 4G coverage.

We believe this will help us retain subscribers. Currently, our new subscriber acquisition rate is already higher than our market share, indicating that lack of 4G coverage is the primary reason for subscriber loss. We are hopeful that as we expand our 4G coverage through our funding and investments, we will see positive results.

Sajeet Manghat: I see you are the third largest player in 15 circles. Is your aim to move from third to second place in those circles?

Akshaya Moondra: Changing our rankings is not our main focus.

Sajeet Manghat: I was referring to increasing your revenue market share. Would that also be a goal?

Akshaya Moondra: That could be an outcome, but our strategy revolves around making investments to grow our revenues. Our focus is on executing our strategy through investments.

Whether this will lead to a change in market share is not something I'm commenting on directly. Historically, when any player significantly expands their coverage, it often results in improvements as they participate in a larger market.

However, our main focus remains on executing our strategy, making planned investments, and deriving benefits from them. We've always emphasised making good use of capital, which guides our decision-making on where and how to invest.

Sajeet Manghat: After this fundraising, when can we expect improvements in your revenue mix, ARPU, and subscriber additions?

Akshaya Moondra: Our revenues and subscribers have been improving, but the investment should make this improvement more significant. The focus of our investment will be to address the loss of subscribers due to the lack of 4G coverage and to roll out 5G. I can't give you a specific timeline, but investing in 4G coverage is our top priority. We expect that once this investment is completed promptly.

Sajeet Manghat: Do you believe you've reached the bottom in terms of subscriber loss on a gross level? You've been increasing 4G subscribers, but overall, there's still a loss. Do you foresee a turnaround with improved coverage going forward?

Akshaya Moondra: We need to make the investments first to improve coverage and user experience. Once we achieve this, we're hopeful that we'll be able to retain subscribers. Currently, our new customer acquisition rate is higher than our market share, indicating potential for subscriber retention with improved coverage.

Sajeet Manghat: Investors are expecting at least 15 million net subscriber additions annually from you. Do you think this is achievable?

Akshaya Moondra: We aim to participate in industry growth and achieve a reasonable share. We're already exceeding expectations in terms of new customer acquisitions, so we hope to meet the investors' expectations.

Sajeet Manghat: On the tariff front, it's widely known that tariffs are low, but nobody wants to be the first to raise them. The question is, who will take that step? It's expected that you will have to do it, right? This is the assurance given to investors—that your ARPU and revenues will increase. Can you give me a general idea of how much tariffs could potentially rise for you? I understand you want to do this gradually, but what is the potential increase?

Akshaya Moondra: Let me explain. Firstly, what should the extent of the tariff increase be? Tariffs should at least reach a level where the industry can begin to cover its cost of capital. Currently, no operator is achieving this, and we've been operating below the cost of capital for an extended period, which is not sustainable for any industry. Without this, the industry won't generate the necessary cash for future investments. Telecom is an industry that continually requires investment, so cash generation needs to reach a level where the cost of capital is covered.

Secondly, how much should the increase be? I can't provide an exact figure, but there's been a lot of discussion among our peers. Including the 5G investment, the industry consensus is that the figures needed to cover the cost of capital should be reasonable. Therefore, a significant correction is needed from where we are now to reach a level where the cost of capital is covered. There's a sense of urgency because even in a 4G scenario, the cost of capital was not covered for quite some time. The addition of 5G has further exacerbated this situation.

So, there is a strong need for tariffs to reach sustainable levels, allowing the industry to make further investments. I would anticipate this increase to occur at a faster pace than what we've seen before. The last two tariff increases were well absorbed by the market, suggesting that the market can adapt. Sometimes concerns arise when the increase is too steep all at once, but over the last four years, price increases have been well received in the market.

Sajeet Manghat: I understand there might be a need for a 20 to 25% increase in tariffs post-elections up to FY26 to achieve the return on capital. Is that the target range you're aiming for?

Akshaya Moondra: Regarding the return on capital, we need to assess the current level of ARPU and the ARPU required to reach the cost of capital. The gap between these figures is much greater than 20% currently, so a 20% tariff correction will not suffice.

As for the exact amount of tariff correction, I cannot specify, but historically, tariff corrections of around 20% have been well received by the market.

Sajeet Manghat: The moratorium ends on Sept. 25, so each operator will aim to increase their operations to generate internal cash flows for government fees. How do you see your position? Will you generate enough cash flows to manage debt repayments?

Akshaya Moondra: As mentioned earlier, our funding is primarily for new capital expenditure, and existing obligations will be managed from our internal networks, which we expect to improve with these investments. Whether we can cover all obligations immediately after the moratorium with our improved cash position remains to be seen.

However, it's important to note that the government reforms package allows for the conversion of the four-year installment series, which can be deferred, into equities by the government. This provision was included in the reforms package because there was a recognition that while cash generation from the business would improve, it might not be sufficient to cover all government obligations immediately after the moratorium ends. This option will be available starting from October as a form of support if needed.

Sajeet Manghat: That could serve as a safety net for every telecom operator, right?

Akshaya Moondra: Yes, it's available for any operator who has opted for deferment. Not everyone has, but it's an option for those who have.

Sajeet Manghat: I've been speaking with analysts and many of the investors who are considering participating in your FPO. They believe that if Vodafone Idea can execute its planned transition from 4G to 5G, along with the targeted annual subscriber additions, the revenues could reach close to Rs 75,000 crore by FY26. Is this target achievable?

Akshaya Moondra: I can't comment on specific targets at this time.