Rating Rationale November 01, 2019 | Limited Rating downgraded to 'CRISIL BBB+'; Placed on 'Watch Negative'

Rating Action CRISIL BBB+ (Downgraded from 'CRISIL A/Negative'; Rs.3500 Crore Non Convertible Debentures Placed on 'Rating Watch with Negative Implications') 1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities Detailed Rationale CRISIL has downgraded its rating on the Rs 3,500 crore non-convertible debentures (NCDs) of Vodafone Idea Limited (VIL) to 'CRISIL BBB+' from 'CRISIL A/Negative'. The rating has subsequently been placed on 'Rating Watch with Negative Implications'.

The downgrade reflects VIL's weakening credit profile on account of continued modest operating performance, delays in monetisation of stake in Ltd (CRISIL AA+/Stable/CRISIL A1+) and the resultant stretch in its debt protection metrics.

VIL's operating profitability is likely to be lower than expectation. Earnings before interest tax depreciation and amortisation (EBITDA - operating profit) declined by Rs 350 crore, on-quarter, in the first quarter of fiscal 2020. VIL has lost 66.6 million subscribers over the 12 months through August 2019. The continued subscriber loss has negated the benefits of higher average revenue per user (ARPU) and synergy benefits.

VIL plans to monetise its 11.15% stake in Indus Towers, post completion of the Bharti Infratel and Indus Towers merger. However, the merger is still awaiting certain approvals. Now, the long stop date for the proposed merger has been shifted by 60 days to December 24, 2019. Consequently, VIL's plan to sell stake in Indus Tower is also delayed. Further, the likely realisations from the stake sale would now be lower than expectations.

As a result, debt protection metrics are now expected to be weaker. Net debt to EBITDA and interest coverage ratios are expected to remain over 10 times and below 1 time, respectively, for fiscal 2020.

The watch negative follows the Supreme Court's ruling on AGR matter against telecom operators (including VIL) in a long pending dispute with the Department of Telecommunication's (DoT). VIL's financial risk profile could significantly deteriorate on account of a potential payout. The company is in discussion with DoT to evaluate options to address the situation.

The Supreme Court has upheld DoT's definition of adjusted gross revenue (AGR). AGR forms the basis for revenue sharing arrangements, between telecom operators and the government, such as license fee and spectrum usage charges. As per the DoT's demand raised during the proceedings of the case for License fee dues, VIL may be required to pay Rs 28,309 crore (including license fee, interest amount, penalty and interest on penalty). It is to be noted that while the judgement has made clear the definition of AGR, clarity is awaited regarding the exact liability and the payment terms. The Supreme Court has further stated that the telecom operators have three months to comply with the judgement. Telecom operators are also contemplating various remedial options, including filing a review petition, approaching government for elongated payment terms, waiver of interest and penalty amounts, amongst others.

CRISIL will resolve the watch and take a final rating action once clarity emerges around the amount of dues, payment terms and company's funding plan to meet such liability.

The rating factors in continued weak operating performance leading to modest debt protection metrics and vulnerability to regulatory changes and technological risks. These weaknesses are partially supported by VIL's established market position in the mobile telephone segment in and support from strong sponsors. Analytical Approach CRISIL has combined the business and financial risk profiles of VIL and its subsidiaries. This is because the entities, collectively referred to as Vodafone Idea, operate in the same line of business and have a common management.

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. Key Rating Drivers & Detailed Description Strengths: / * Established market position in the mobile telephone segment in India After the amalgamation, VIL has emerged as one of the significant mobile operators in India. It has gross revenue market share (around 29.4% in the quarter ended June 30, 2019), subscriber market share (32% as on August 31, 2019), and spectrum holdings (1,850 megahertz [MHz], of which around 1,715 MHz can be utilised for deploying any technology, 2G, 3G, 4G, or 5G). Over 70% of the spectrum of the group has validity of 2034-2036 MHz. It has been providing wireless voice and broadband services across all 22 circles in India, and the quantum of spectrum available provides a cushion to handle future requirement.

As of June 2019, the group has already completed network integration in 10 circles, which accounts for than 50% of 4G revenue. The ability to seamlessly transition to a unified network while sustaining the market position will be a key rating sensitivity factor.

* Support from strong sponsors VIL has the backing of, and has received robust support from, Vodafone Group Plc (Vodafone; rated 'BBB/Stable/A-2' by S&P Global Ratings) and the (ABG), which exercise equal management control. In May 2019, VIL successfully raised equity of Rs 25,000 crore, out of which Vodafone and ABG contributed Rs 11,000 crore and Rs 6,920 crore, respectively. Before the completion of the merger, Vodafone brought in equity of Rs 8,600 crore into Vodafone India Ltd while ABG brought in Rs 3,250 crore in Ltd (ICL). The presence of strong sponsors also aids financial flexibility. CRISIL will continue to closely monitor support being received from both the sponsors.

Weaknesses: * Continued weak operating performance leading to below-average debt protection metrics The domestic telecom industry has been through a roller coaster ride over the past few years. The price war, which started after Reliance Jio Infocomm Ltd ('CRISIL AAA(CE)/CRISIL AAA/Stable/CRISIL A1+') launched its services, has eroded industry's revenue. This, along with reduction in call termination charges, led to a significant decline in ARPU. Company reported an ARPU of Rs 88 for the quarter ended September 2018, i.e. first quarter after the amalgamation.

Though measures such as introduction of minimum recharge packs has increased ARPU to Rs 108 for the quarter ended June 2019, it has also led to significant increase in subscriber churn with loss of around 66.6 million subscriber over the 12 month ended August 2019.

As a result of intense competition, company's revenue and operating profits were lower by Rs 500 crore and Rs 340 crore on quarter, respectively, in the first quarter of fiscal 2020. CRISIL expects the operating performance to remain moderate though the quantum of synergy benefits, improvement in profitability, and materialisation of deleveraging plans will remain key rating sensitivity factors over the medium term.

* Exposure to technological changes and regulatory risks The telecom industry remains susceptible to regulatory and technological changes. New technology could necessitate fresh investments or an overhaul of network. Advent of 4G, for instance, has seen operators investing substantially in upgrading infrastructure even before they could make significant returns on investments in 3G.

The telecom industry is highly regulated, and therefore, players remain vulnerable to changes in regulations. The government reduced termination charges per minute for domestic and international calls from 14 paise and 53 paise, respectively, to 6 paise and 30 paise, respectively; this has constrained the profitability of large incumbent players. DoT had earlier planned to reduce domestic termination charges (also called interconnect usage charges) to zero paisa per minute with effect from January 01, 2020. However, telecom regulatory authority of India has floated a consultation paper for potential postponement of the earlier plan. This could have a significant bearing on VIL's profitability as it earns more than Rs 250 crore per quarter from the interconnect usage charges. Final outcome in this regard will continue to be monitored. Liquidity Adequate Liquidity is comfortable, marked by liquid surplus of Rs 21,180 crore as on June 30, 2019, against principal repayment of Rs 4,200 crore in the 9 months ended March 31, 2020. A large part of the liquid surplus is likely to be unencumbered. Cash accrual is expected to improve only gradually while capex of around Rs 13,000 crore is likely to be undertaken in the 9 months ended March 31, 2020. However, the recent Supreme Court ruling could potentially impact liquidity if required to pay in the short term. Liquidity is also supported by planned monetisation of assets and lean working capital cycle.

Rating sensitivity factors Upward factor * Substantial relief from government leading to sustained improvement in cash accruals * Debt to EBITDA ratio sustaining below 5 times * Significant financial support from the promoters leading to correction in capital structure

Downward factor * Debt to EBITDA ratio sustaining above 10 times * Lower-than-expected synergy benefits * Further weakening of operating performance constraining cash accrual About the Company VIL is one of the leading mobile service providers in India. It operates in all 22 service areas in the country. /

Vodafone and ABG own 44.39% and 27.18% stake, respectively, on a fully diluted basis in VIL as on June 30, 2019. Vodafone is a globally renowned international mobile communications conglomerate with operations in 25 countries, over 65 crore customers, and more than 41 partner networks. ABG is a large Indian conglomerate with operations in 34 countries across 5 continents.

Net loss was Rs 4,874 crore on revenue of Rs 11,270 crore in the quarter ended June 30, 2019. Key Financial Indicators As on / for the period ended March 31 Units 2019 2018 Revenue Rs crore 48,747 63,138 Profit after tax (PAT) Rs crore -13,371 -12,285 PAT margin % -27.4 -19.4 Debt/EBITDA Times 23.1 10.3 Adjusted interest coverage Times 0.49 1.25

Any other information: Not applicable

Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s) Name of Date of Coupon Maturity Issue size Rating assigned ISIN instrument allotment rate (%) date (Rs crore) with outlook CRISIL BBB+/Watch INE713G08046 Debentures 12-Jun-15 8.25% 10-Jul-20 3,500.00 Negative

Annexure - List of entities consolidated Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation Idea Cellular Services Ltd Fully consolidated Strong financial and business linkages Idea Telesystems Ltd Fully consolidated Strong financial and business linkages You Broadband India Ltd Fully consolidated Strong financial and business linkages You System Integration Private Ltd Fully consolidated Strong financial and business linkages Vodafone Business Services Ltd Fully consolidated Strong financial and business linkages Mobile Commerce Solutions Ltd Fully consolidated Strong financial and business linkages Vodafone Towers Ltd Fully consolidated Strong financial and business linkages Vodafone Foundation Fully consolidated Strong financial and business linkages Vodafone Technology Solutions Ltd Fully consolidated Strong financial and business linkages Vodafone m-pesa Ltd Fully consolidated Strong financial and business linkages Vodafone India Ventures Ltd Fully consolidated Strong financial and business linkages Vodafone India Digital Ltd Fully consolidated Strong financial and business linkages Connect (India) Mobile Technologies Pvt Ltd Fully consolidated Strong financial and business linkages Aditya Birla Idea Payments Bank Ltd Equity method Proportionate consolidation Indus Towers Ltd Equity method Proportionate consolidation Firefly Networks Ltd Equity method Proportionate consolidation

Annexure - Rating History for last 3 Years Start of Current 2019 (History) 2018 2017 2016 2016 Outstanding Instrument Type Rating Date Rating Date Rating Date Rating Date Rating Rating Amount

Commercial ST -- 18-01-19 Withdrawn 28-11-18 CRISIL A1+ ------Paper CRISIL Non Convertible 3500.00 CRISIL CRISIL Debentures LT 01-11-19 BBB+/Watch 06-08-19 A/Negative 28-11-18 A+/Negative ------Negative CRISIL 18-01-19 A+/Negative Short Term CRISIL ST ------14-11-16 Withdrawn Debt A1+ All amounts are in Rs.Cr.

Links to related criteria CRISILs Approach to Financial Ratios / Rating criteria for manufaturing and service sector companies Rating Criteria for Mobile Telephony Services CRISILs Criteria for Consolidation CRISILs Criteria for rating short term debt

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India Ratings Downgrades Vodafone Idea and its NCDs to ‘IND BBB’; Places on RWN

01

NOV 2019

By Priyanka Bansal

India Ratings and Research (Ind-Ra) has downgraded Vodafone Idea Limited’s (VIL) Long-Term Issuer Rating to ‘IND BBB’ from ‘IND A+’ and simultaneously placed it on Rating Watch Negative (RWN). The Outlook on the earlier rating was Negative. The instrument-wise rating action is as follows:

Instrument ISIN Date of Coupon Maturity Size of Rating/Rating Rating Type Issuance Rate Date Issue Watch Action (%) (billion)

Non- INE713G08046 12 June 8.25 10 July INR35 IND BBB/RWN Downgraded; convertible 2015 2020 placed on debentures RWN (NCDs)

Analytical Approach: Ind-Ra continues to take a consolidated view of VIL and all of its subsidiaries while arriving at the ratings because of the close operational and strategic linkages among them.

The rating action reflects heightened risk on VIL’s near-term liquidity position, deterioration in operating performance and weakening of financial support from the promoters (Aditya Birla Group and Vodafone Plc) in FY22.

KEY RATING DRIVERS

Liquidity Indicator – Stretched: Post the rights issue of INR250 billion, VIL has cash balance of INR211.8 billion as of June 2019. However, in Ind-Ra’s view, VIL’s liquidity profile is stretched as free cash flows are likely to remain negative over FY20- FY22 and VIL would continue to rely on refinancing or capital infusion from the sponsors to meet its debt obligations and capex requirement. VIL has debt repayment obligations of INR135 billion (principal debt repayment and spectrum liabilities) till

/ June 2020. Additionally, interest payment on financial loans of about INR14 billion till June 2020 and capex spending (1QFY20: INR28.4 billion) would put additional burden on VIL’s liquidity. Also, the following three events have further heightened risk on VIL’s liquidity situation:

1. Adverse Supreme Court Ruling: On 24 October 2019, the Supreme Court of India ruled in favour of Department of Telecommunications (DoT) against telecom companies in the dispute related to the definition of adjusted gross revenue (AGR). The court directed VIL to pay INR280 billion (license fees of INR69 billion and the balance is interest and penalty) over the next three months. While telecom players may evaluate options to mitigate the impact of the adverse ruling, the event as such pose significant risk on VIL’s credit profile. Nonetheless, the ratings factor in the possibility of some relief and/or grant of relief package (including deferment of spectrum dues) by the government to improve the overall financial health of the telecom sector, which will remain a key monitorable.

2. Risk of Acceleration of Bank Loans: VIL has classified INR102 billion from non-current borrowing to current maturity of long-term borrowing in 4QFY19 for not meeting certain covenants in the financing documents. All relevant banks in this regard have not yet confirmed waiver of the covenants, resulting in a risk of acceleration of payment.

3. Delay in Asset Monetisation: Ind-Ra had earlier assumed that monetisation of fibre assets (expected proceeds could be INR110 billion) and 11.15% stake in Indus Towers (expected proceeds could be INR51 billion) by December 2019 would support VIL’s near-term liquidity. So far, there is lack of visibility over timelines and proceeds from asset monetisation, especially for the fibre assets. Ind-Ra notes that even if the liabilities towards the Supreme Court ruling and acceleration of bank loan payment do not crystallise, the asset monetisation remains critical for VIL to maintain its liquidity buffer in 1HFY21. Consequently, any delay in visibility of completing the fibre asset monetisation beyond FY20 would be negative for the ratings.

Continued Weak Operational Performance: VIL’s subscriber market share (visitor location register) declined to 32% in July 2019 as against 36% in March 2019. Its revenue market share declined to about 29% in 1QFY20, as against about 32% in 4QFY19. Competition persists in the sector with VIL and Ltd’s tariffs in INR/gigabyte terms remain at a meaningful premium to others’, thereby putting VIL’s market share at continued risk. Ind-Ra believes the subscriber base is unlikely to show a meaningful recovery in the near-to-medium term, given the sustained competitive pressures.

Weakening of Financial Support from Promoter Groups: Aditya Birla Group held a 26% stake in VIL as of 31 March 2019, predominantly through Limited (11.6%, ‘IND AAA’/Stable), Hindalco Industries Limited (2.6%), Birla TMT Holdings Private Limited and IGH Holdings Private Limited (about 4% each) and other ABG investment entities. Vodafone Plc (Fitch Ratings Ltd Issuer Default Rating: ‘BBB+’/Stable) held a 45.3% stake in VIL as of 31 March 2019.

Since January 2018, around INR483 billion has been infused in erstwhile Idea Cellular Limited, erstwhile Vodafone India Limited and VIL, through capital infusion and/or asset sale. The most recent capital infusion has been their contribution of INR179 billion in the rights issue. However, Ind-Ra estimates that VIL may require capital infusions in late-FY21 and FY22 to service its debt obligations and fund the network capex. The company’s total debt obligations including net interest pay-outs and spectrum liabilities are likely to be at INR180 billion-185 billion in FY21 and INR215 billion-220 billion in FY22. The agency expects capex intensity to moderate, which may provide some respite. However, even after considering meaningful recovery in profitability of telecom industry in FY22, the shortfall funding required to be bridged either through external debt or sponsor support is fairly large.

Vodafone Plc has ring-fenced the India business to two assets, namely, its 42% stake in Indus Towers and its 45.3% stake in VIL. Vodafone Plc funded its contribution of INR110 billion indirectly through a loan secured against its Indian assets. Also, Vodafone Plc aims to utilise proceeds from the sale of its 42% stake in Indus Towers (about INR192 billion as per Ind-Ra’s estimates) to repay its contribution of INR110 billion, thereby significantly limiting Vodafone Plc’s ability to support VIL beyond FY21-1HFY22. Assuming Vodafone Plc monetises its 42% stake in Indus Tower for INR192 billion cash and utilises the proceeds for repayment of INR110 billion of loan, the total funding flexibility with Vodafone Plc to support VIL would be about INR82 billion.

/ Ind-Ra is factoring in likely support from Aditya Birla Group to VIL. However, continuation of support remains contingent on recovery in telecom industry’s profitability and viability of the VIL’s business model in the long-term, which remains key rating monitarable for Ind-Ra.

Weakening Credit Metrics: VIL’s pro forma gross leverage (gross debt/EBITDA) deteriorated to around 24x in FY19 (FY18: 11x) as EBITDA declined meaningfully to INR52.7 billion (INR119.3 billion) and gross debt remained above INR1,200 billion. Ind-Ra expects VIL’s EBITDA margins to be around 32% by FY22, largely supported by annual net merger synergies. Even in such scenario, VIL’s gross leverage will exceed 6x and gross interest coverage (EBITDA/gross interest expense) will be below 1.5x till FY22. Ind-Ra has not built-in any incremental capex towards spectrum acquisition or 5G roll-out over the next two years.

Third-Largest Player in Indian Telecom Industry: Post the merger, VIL has become India’s largest telecommunication service provider with a subscriber base of 311 million, representing revenue market share of 28% in 1QFY20. The company has 92% population coverage with over 200,000 cell sites and 1,850MHz of total spectrum holding. The merger has also complemented the circle presence of both entities as the erstwhile Idea Cellular had a strong presence in rural areas, while the erstwhile Vodafone India had a strong presence in urban areas.

Regulatory and Technology Risks: India’s telecommunication services industry, which is capital-intensive in nature, is exposed to changes in the technology. According to media reports, the Indian government is considering an additional spectrum auction and roll-out of 5G technology by 2020, which may lead to additional investments by extant telecommunication players even when they are yet to recover their investments in the 4G technology. Also, the telecom industry is highly regulated, which exposes players to adverse regulatory changes. For instance, a reduction in the interconnect usage charges to INR0.06/minute in October 2017 from INR0.14/minute earlier impacted the profitability of players substantially.

RATING SENSITIVITIES

The RWN indicates that the ratings may be downgraded or affirmed. Ind-Ra is likely to resolve the RWN by January 2020 once greater visibility on VIL’s liquidity situation is received.

COMPANY PROFILE

VIL is a telecommunication service provider, offering voice and data services across all 22 service areas in India. It has broadband subscriber base of 110.5 million.

FINANCIAL SUMMARY

Particulars* FY19 FY18

Revenue (INR billion) 485.1 625.9

EBITDA (INR billion) 52.7 119.3

EBITDA margin (%) 10.9 19.1

EBITDA interest coverage (x) - 1.3

Net adjusted debt/EBITDA (x) 22.5 9.8

/ Source: VIL, Ind-Ra *Ind-Ra has prepared pro forma consolidated financials of VIL for FY18 using annual financials of VoIL and Idea Cellular. FY19 pro forma financials have been reported by VIL.

RATING HISTORY

Instrument Type Current Rating/Rating Watch Historical Rating/Outlook/Rating Watch

Rating Type Rated Rating 24 July 15 4 Limits 2019 March December (billion) 2019 2018

Issuer rating Long-term IND BBB/RWN IND IND IND A+/Negative A+/RWN AA-/Negative

NCDs Long-term INR35 IND BBB/RWN IND IND IND A+/Negative A+/RWN AA-/Negative

COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

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Applicable Criteria

Corporate Rating Methodology

Analyst Names

Primary Analyst Priyanka Bansal

Analyst India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051 +91 22 40356148

Secondary Analyst Prashant Tarwadi

Director +91 22 40001772

Committee Chairperson Rakesh Valecha

Senior Director - Core Analytical Group +91 22 40001740

Media Relation Namita Sharma

/ Manager – Corporate Communication +91 22 40356121

/