Government’s decision to move forward with Vodafone Idea equity conversion
The government’s decision to convert Vodafone Idea‘s statutory liabilities into equity and provide significant financial support for BSNL and MTNL, as outlined in the Union Budget 2025, is expected to have a profound impact on the telecom sector in FY26.
Analysts at India Ratings and Research (Ind-Ra) anticipate that these actions will influence competitive dynamics, market share shifts, ARPU trends, and the recovery of return ratios over the next two to three years.
Spectrum installments from October 2025 to March 2026 and AGR installments due in March 2026 for Vodafone Idea amount to approximately $3.3 billion (Rs 272 billion).
Additionally, the telco must furnish bank guarantees of $3 billion (Rs 247 billion) to the government for annual spectrum installments due by September 2026, as per the Ind-Ra presentation, which referenced information from Vi con call and quarterly reports.
In February 2023, the Indian government converted Vodafone Idea’s interest dues, totaling $1.96 billion, into equity. This conversion led to the government becoming the largest shareholder in the company, with a 33.14 percent stake. The stake in the company decreased to 23.8 percent after a successful follow-on public offer (FPO) in April 2024. Vodafone Group and the Aditya Birla Group hold 22.56 percent and 14.76 percent stakes in Vi, respectively.
Ind-Ra has a “neutral” outlook for the telecom industry in FY26, stating that pivotal policy decisions will shape the sector’s trajectory. The agency predicts a 6-10 percent year-on-year increase in industry-wide tariffs in FY26, driven by recent tariff hikes and an organic tariff growth of 3-5 percent from changes in the user mix.
“ROCE recovery will be a crucial factor in regulatory and corporate decision-making in FY26,” stated Priyanka Bansal, Associate Director at Ind-Ra, referring to return on capital employed. For public sector undertakings, government support is anticipated to become more need-based, focusing on enhancing structural competitiveness and operational efficiencies.
Private operators, on the other hand, are considering tariff hikes as essential to recoup 5G-related capital expenditures and improve ROCE. However, achieving higher returns poses challenges, as ARPUs must increase by 25-35 percent (Rs 60-70) from Q2FY25 to achieve a 15 percent ROCE, according to Bansal.
Industry Challenges
Ind-Ra has highlighted a deteriorating outlook for the telecom tower sector in FY26. The benefits from 5G-related capital expenditures have not yet materialized, and prolonged dependence on government support, overdue receivables, and the partial conversion of dues into equity for Vodafone Idea continue to strain liquidity.
“Despite timely payments since December 2023, significant overdue payments persist. Additionally, the conversion of dues into equity is credit negative,” the agency noted.
Broadband as a Key Growth Opportunity
Broadband represents a promising $6-7 billion market for telecom operators, with India’s home broadband penetration at only 16 percent, up from 8 percent in FY20 but still lagging behind other developing nations.
“India’s 280 million total households and 180 million cable-TV households offer significant potential. Telcos are already targeting this market by expanding their presence in non-mobility services like broadband and fibre-to-the-home (FTTH),” the agency explained. Challenges such as last-mile connectivity issues, high deployment costs (underground cabling is 8-10x costlier than aerial cables), and competition from local cable operators hinder FTTH growth.”
Broadband subscription Average Revenue Per User (ARPU) is significantly higher than that of mobility services, providing telecommunications companies with the opportunity to offer additional revenue-generating services with a payback period of around 43 months. The potential of 5G fixed wireless access (FWA) was also highlighted as a solution to the challenges faced by the Fiber-to-the-Home (FTTH) segment, with telecommunications companies increasingly turning to FWA as an alternative broadband option.
Ind-Ra predicts a decrease in capital expenditure momentum for Airtel and Reliance Jio in the fiscal year 2026, following the conclusion of investments related to 5G and spectrum auctions.
During its Telecom Outlook FY26 presentation, Ind-Ra stressed the importance of making strategic decisions to navigate the upcoming challenges and opportunities as the industry gears up for a transformative phase.
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Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.