Shares of Vodafone Idea tumbled as much as 20 percent on Tuesday after today's announcements made by the telecom operator failed to excite the Street. At 1427 IST, shares of Vodafone Idea were down 19.5 percent at Rs 11.95 on BSE.

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The board of directors approved deferment of spectrum auction instalments due up to four years. It has also approved the deferment of AGR-related dues by 4 years and given a nod to convert interest on spectrum instalments, AGR dues, into equity.

Conversion to equity is expected to result in dilution for all existing shareholders including promoters. Following the conversion, Government will hold around 35.8 percent in Vodafone Idea. The telecom operator will hold 28.5 percent stake and Aditya Birla Group will own 17.8 percent stake after the conversion of interest to equity, Vodafone Idea said in an exchange filing.

Equity shares will be issued to the Government at Rs 10 per share, after confirmation by the Department of Telecommunications. This is at nearly 33 percent discount to the previous close of Rs 14.85.

This conversion will result in massive equity dilution to all existing Vodafone Idea shareholders, CLSA said in a note to clients.

According to Nitin Soni, Senior Director, Corporates at Fitch Ratings, this development was on expected lines.

During an interaction with CNBC-TV18, Soni said that he expects business as usual for Vi and this will provide some cashflow relief to the company to spend more on 4G expansion. However, he believes Vi is still in a very precarious situation because even after the tariff hikes, it is still not investing enough on the capex side. He doesn’t see any new investors putting big amount of money into the company in the short-term.

However, CLSA pointed out that even after relief, Vodafone Idea will likely struggle to fund annual spectrum payments beyond an additional four-year moratorium unless Average Revenue Per User (ARPU) reaches approximately Rs 250-300. At the end of the four-year moratorium, there will also be an option to convert principal dues into equity, at the discretion of the government, the foreign brokerage firm added.

CLSA has maintained its 'underperform' recommendation on shares of the telco with a target price of Rs 16.

The net present value of interest on spectrum auction and AGR is expected to be about Rs 16,000 crore, Vodafone Idea added.

The stock opened with a loss of nearly 10 percent today and was locked in the 10 percent lower circuit limit. After breaking the circuit limit, shares fell further and touched 20 percent lower circuit limit.

“This equity dilution is significant, it’s almost 40 percent; Rs 16,000 crore getting translated into 38.5 percent equity is huge. However, I do not know whether this is last of its kind in terms of dilution because Vodafone will continue to need infusion of funds in some form or other whether through new investor and not just the government,” said market expert Prakash Diwan.

Meanwhile, Dipan Mehta, Director, Elixir Equities said that “I don't really have a handle on what the quantum of the dilution is going to be. But maybe that's the way it is to be because if they're unable to raise funds, as they've been trying for so long, and this is the only way to stay viable, and maybe existing shareholders will have to live with that kind of a dilution".

"In any case, at present the stock is a delight of these speculators, it is hardly any institutional or long term investors in the stock and this news will have some negative sentiment, but because of its low price and volatility as far as news flow is concerned, you may see the stock move up and down depending upon what actually the outcome is of this particular agenda on the board,” added Mehta.

(Note: The story has been updated with more details from CLSA research note.)

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First Published:Jan 11, 2022 10:37 AM IST