Recently the GOI decided to convert the VI’s interest payment obligations during the moratorium period into preferential equity. Doing so gives GOI 32.09% ownership of the company. The details for the same are embedded on page 18 of the EGM minutes dated 31st Jan 2023. The interest amount under consideration was approximately Rs 16 K Cr. The GOI’s decision to convert VI’s interest obligation (of the moratorium period) was based on the PIB release dated 25th Sept 2021. This initiative was taken by GOI in order to reduce the stress in the telecom sector so that its competitiveness can be preserved. The purpose of this note is to estimate the remaining debt obligation that VI has to encounter after the expiry of the moratorium period (25th Sept 2025).
VI’s Outstanding Debt
VI’s debt can be categorized into two compartments — a) The debt that it owes to GOI (AGR + auction deferred); b) And to the Commercial Banks. The latter is minuscule compared to the former. As per VI’s F22 annual report, the principal outstanding on the GOI debt stands at Rs 1.91 Lakh Cr. The details are available in my earlier note — The Collateral Damage of VI going out of business.
VI’s Pending Obligation
The GOI’s decision to convert Rs 16 K Cr of accumulated interest on the pending EYI (easy yearly installments) can be seen as a relief. But in order to understand the overall financial position of VI, it is important to estimate VI’s pending obligation after the end of the moratorium period. For that, we have to estimate the yearly installment that VI was supposed to pay during the period of the moratorium and beyond. Now, our ability to estimate this accurately will be a challenge — as this obligation emanates from multiple auctions with different payment conditions (both upfront and deferred) and at various rates. And none of these is available in the public domain.
Hence, I plan to rely on the information provided by VI in its annual report for FY22 (page 365), on the principal outstanding of the GOI debt held on 31st March 2022. Fortunately, this document also lays out the remaining number of installments left.
Now, before we dwell on the calculations, we have to refresh the basics on — a) How the EYI is calculated; b) How can we estimate the EYI numbers by just relying on the outstanding value of the principal on 31st March 2022 (broken down by auctions).
Formula to Estimate (EYI)
The following picture provides us with a mathematical explanation.
Note in order for us to be able to use this formula to estimate the yearly installments, we need the original deferred payment amount. But we don’t have it handy. So what do we do? Can we use the principal outstanding value as mentioned in the annual report to estimate the yearly installments? Maybe we can, but we have to check this mathematically before going forward with this approach.
EYI Breakup (Principal & Interest)
In order to check if the EYI formula still works in case we plug in the principals outstanding on 31st March 2022, we have to first understand how this “outstanding principal” gets calculated. The following picture lays out the concept.
We can see from the above, EMI has two components- a) The Principal Part; b) The Interest Part. The “interest part” is nothing but the value that emanates from multiplying the “outstanding amount” by the rate of interest spelled out in the “NIA” (Notice Inviting Applications). Now, subtracting this “principal part” from the earlier outstanding will end up laying out the current outstanding and so on.
The Validity of EYI Formula
Now for us to be able to estimate the EYI, we need to check if the EYI formula is still valid if we plug in the outstanding values of the Principal as mentioned in the Annual Report (Dated 31st March 22) in the EYI formula of figure 1. If yes, what additional tweaks if any are required? The following figure provides us with an explanation.
Hence, by plugging the outstanding value of the principal in the EYI formula, and by reducing the value of “n” by the number of years left (mentioned in the annual report), we can still use the EYI formula to calculate the “yearly installment” — that we need to estimate the interest obligation of VI on account of the GOI’s moratorium, and the pending obligations left at the end of that period.
Estimating Additional Interest (Moratorium Period)
Estimating this value is important as this is what translated into the GOI’s preferential shares of 33% in VI. Here are the charts that I used for estimating this amount.
Now the last column in each of the boxes estimates the accumulated interest on the installments that got deferred due to the moratorium of 4 years offered by the government. Note adding all these amounts translates to a value of Rs 14.2 K Cr. This is Rs 2 K less (12.5 % less) than what GOI has calculated. Hence, some more refinement might be needed which I am unable to do because of the paucity of information. But I presume these values of the yearly installments are good enough from the point of view of making the business analysis and the impact on VI after the moratorium period ends.
Note — While estimating the above numbers I have assumed that the GOI has only deferred the payment of the installments and NOT extended the period of installments by additional 4 years. For that, I have referred to the notification issued by the IPP division dated 31st Oct 2021.
Estimating Obligation (Immediately After Moratorium)
Now as soon as the moratorium ends the principal & interest of the original EYI calculated after the end of the auctions will stand as stipulated by the NIA. Hence, VI’s obligation to pay will be — a) Applicable EYI for that year; b) plus the EYI of all the years for which the moratorium was granted. This will stand at a whopping 1.3 Lakh Cr — i.e on the year when no moratorium is applicable. Thereafter, the normal EYI will stand. This will be approximately Rs 20 K Cr (for a few years till the remaining tenure ends).
Note this EYI does not include the installments that emanate out from the 2021 & 2022 auctions, as these are not part of the moratorium order.
VI’s Options (After the end of Moratorium)
Now VI has two options — a) pay up the estimated amount on the year when the moratorium period ends; b) hope that GOI converts additional amounts into preferential equity. Fortunately, the PIB release dated 15th Sept 2021, has an optional clause to that effect which is reproduced below for reference.
At the option of the Government, to convert the due amount pertaining to the said deferred payment by way of equity at the end of the Moratorium/Deferment period, guidelines for which will be finalized by the Ministry of Finance.
Hence, GOI might come out with another round of notifications to convert the full or a portion of the EYI into preferential shares. If we make an assumption that Rs 1 Lakh Cr of the dues pending after the moratorium gets converted into equity, then GOI will end up owing 74% of VI [(16+100)/(50.27+100)].
Explanation- Rs 16 K Cr gave GOI 16 billion shares at Rs 10 each. Now if we assume that the promotor’s share remains the same, then an additional Rs 100 K Cr will give GOI additional 100 billion shares (each at Rs 10/-). This means the total shares that GOI will end up holding will be 116 billion of the total of 150 billion. And this is taking approximately 74% ownership of VI.
Summary
Given the above analysis, looks like if VI is unable to pay its outstanding dues at the end of the moratorium period then it will become a majority government-owned company. But the silver lining is that VI’s debt obligation will get reduced drastically. Less debt means fewer interest outflows and savings in EBITDA for meeting other necessary expenses. Now, the real question here will be — how motivated VI management will feel with large GOI ownership in place, and will the GOI remain hands-off and allow VI to function without getting actively engaged in its daily operations? Finally, will the GOI find an adequate opportunity to divest its share in VI without making a loss sometime in the future? Only time will tell.
(Views expressed are my own and do not reflect that of my employer)
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