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Another lifeline for Vi – pushing the can further down the road

The Government of India (GoI) has approved the conversion of Vi’s upcoming spectrum dues repayment into equity, in line with the provisions in 2021 telecom relief measures. GoI would convert ~INR369.5b spectrum dues into equity at FV (INR10/share). GoI equity conversion provides cash flow relief for Vi and is a key medium-term positive development, but stabilization of its subscriber base, longpending debt raise, and further relief on AGR dues remain vital for Vi’s long-term survival. GoI’s continued commitment to maintaining a 3+1 market construct in the Indian telecom sector and the easing of Vi’s cashflow constraint are also positive for Indus Towers. We retain our Sell rating on Vi with a revised TP of INR6.5/share, while we remain Neutral on Indus Towers and would use any bounce to reduce exposure.

GoI to convert Vi’s spectrum repayments worth ~INR420b into equity

GoI has decided to convert Vi’s outstanding spectrum auction dues pertaining to spectrum auctions prior to 2021, including deferred dues repayable after moratorium, into equity shares. The total amount to be converted into equity shares is INR369.5b, with Vi issuing 36.95b shares (at INR10/share). We believe this conversion would reduce Vi’s spectrum repayments by ~INR420b over FY26-28 and ease its cash constraints considerably till 1HFY28. After the issuance, GoI’s stake in Vi would rise from ~22.6% to ~49%. Vi’s existing promoters will continue to have operational control, albeit with a modest ~25.5% stake.

Vi’s cash constraints to ease considerably till 1HFY28; AGR dues still a worry

Vi had ~INR670b in spectrum dues repayments over FY26-28 (including ~INR67b for 2021-24 spectrum auctions). On our estimates, the proposed equity conversion would help Vi lower its spectrum repayments pertaining to auctions prior to 2021, by ~INR420b (on NPV basis). After the conversion, Vi would have to repay ~INR80b in spectrum dues over 2HFY26-1HFY28, along with ~INR22b annually for the 2021- 24 spectrum auctions. Vi’s current ~INR90b cash EBITDA should largely be sufficient to fund GoI’s spectrum due repayments till 1HFY28, in our view.

Besides spectrum dues, Vi also has to repay ~INR165b annually pertaining to AGR dues, starting Mar’26, which are not part of the proposed conversion. We estimate, Vi’s cashflow to be insufficient to fund its ongoing capex plans alongside AGR dues repayments. However, given GoI’s commitment to maintaining a 3+1 market construct, we believe there could be further relief from GoI on AGR dues.

Further equity conversion could turn Vi into a PSU

After the proposed conversion, GoI’s stake in Vi would increase from ~22.6% currently to ~49%, while Vi’s existing combined promoter stake would be diluted from ~38.7% currently to modest ~25.5% and public shareholders’ stake would also be diluted by ~34% to ~23.8%. However, as GoI’s equity conversion is happening significantly above Vi’s current market price, there would not be value dilution for Vi’s equity holders.

However, as we note above, despite the spectrum due conversion into equity, Vi would continue to require more relief from GoI on AGR dues as well as spectrum payments beyond 1HFY28. With GoI’s stake rising to 49% after the latest equity conversion, any further equity conversion of dues could lead to GoI’s stake crossing 50%, which could turn Vi into a public sector unit (PSU).

Subscriber base stabilization remains the key monitorable for Vi

GoI has been supportive of a 3+1 market structure in the Indian telecom industry, and telcos have also raised tariffs sharply over the last five years. However, Vi has not seen any significant operational improvement as tariff hike benefits have been offset by continued subscriber losses. We believe stabilization of Vi’s subscriber base, along with further relief measures from GoI, remains imperative for Vi’s longterm survival. Despite the likely acceleration in capex over the medium term, we believe gaining back subscribers would be a tall ask for Vi, given its peers’ superior free cash flow generation and deeper pockets. Vi remains a high-risk high-reward play. We raise our TP to INR6.5/sh (from INR5 earlier), driven by GoI’s equity conversion at a premium.

Vi’s cashflow relief a materially positive event for Indus Towers

While there is still uncertainty on AGR dues, we believe GoI remains committed to maintaining a 3+1 market construct. GoI’s recent move provides cashflow support to Vi and could also aid in the completion of Vi’s long-pending debt raise. We believe more comfort on Vi’s survival and improved visibility on the completion of Vi’s capex plans could be materially near-term positive for Indus Towers. However, we retain our Neutral rating on Indus as we believe a sustained re-rating remains contingent on Vi’s long-term revival, which in turn is dependent on its operational improvements. We would use any bounce in Indus’ stock price to reduce exposure.

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