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New Delhi, Jan 24 : India Ratings and Research (Ind-Ra) has downgraded Vodafone Idea Ltd's (VIL) Rs 3,500 crore long-term issuer rating to 'BBB-' from 'BBB' while maintaining it on rating watch negative.

India Ratings said it 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.

In a statement, it said that the downgrade reflects the crystallisation of adjusted gross revenue (AGR) related liabilities for VIL post the Supreme Court's adverse ruling on January 16, 2020, dismissing the review petition filed by telecom companies (telcos).

The SC ruling provides clarity on the AGR liabilities that are payable by VIL to the Department of Telecommunications (DoT), which was earlier contingent upon the outcome of the review petition.

The apex court has, however, agreed to hear the modification application filed by telcos next week.

In this application, the telcos have requested modification in the original Supreme Court order dated October 24, 2019, to decide upon the payment schedule for AGR liabilities and any other relief measures with DoT.

Furthermore, the DoT has decided not to take any coercive action against telcos if they fail to comply with the SC's October 24 order.

India Ratings has said that a deterioration in medium-term liquidity is likely. VIL has classified Rs 102 billion from non-current borrowing to current maturity of long-term borrowing in Q4FY19 for not meeting certain covenants in the financing documents.

"So far, there is a lack of clarity on whether the banks have waived off the covenants. Under the current situation, the risk of acceleration of payment is high, given the company's weak liquidity situation and concern on its going concern status (in the absence of government support). Any payment acceleration on VIL's financial liability will have a negative impact on the rating," the rating agency said.

As of March 31, 2019, Aditya Birla Group (ABG) held a 26 per cent stake in VIL, predominantly through Grasim Industries Ltd (11.6 per cent,), Hindalco Industries Ltd (2.6 per cent), Birla TMT Holdings Private Ltd and IGH Holdings Private Ltd (about 4 per cent each) and other ABG investment entities. Vodafone Plc held a 45.3 per cent stake in VIL, as of March 31, 2019.

Since January 2018, around Rs 483 billion has been infused in the erstwhile Idea Cellular Ltd, erstwhile Vodafone India Ltd and VIL, through capital infusion and/or asset sale.

The most recent capital infusion has been the promoter's contribution of Rs 179 billion in the rights issue. Till India Ratings' last review in November 2019, India Ratings was factoring in likely support from ABG to VIL, but factored in weakening of support from Vodafone Plc.

However, continuation of support from the ABG remains contingent on financial viability of the business, which in the current context looks challenging to India Ratings.

Vodafone Plc has ring-fenced its India business to two assets - its 42 per cent stake in Indus Towers and its 45.3 per cent stake in VIL. Vodafone Plc funded its contribution of Rs 110 billion towards rights issue indirectly through a loan secured against its Indian assets. Furthermore, it aims to utilise proceeds from the sale of its 42 per cent stake in Indus Towers (about Rs 192 billion as per Ind-Ra's estimates) to repay its contribution of Rs 110 billion, thereby significantly limiting Vodafone Plc's ability to support VIL beyond FY21-1HFY22.

Assuming Vodafone Plc monetises its 42 per cent stake in Indus Tower for Rs 192 billion cash and utilises the proceeds for repayment of Rs 110 billion of loan, the total funding flexibility with Vodafone Plc to support VIL would be about Rs 82 billion.

The ratings action also mentions the continued weak operational performance. VIL's subscriber market share (visitor location register) declined to 30.5 per cent in November 2019, as against 36 per cent in March 2019.

Its revenue market share declined to about 27.2 per cent in 2QFY20, as against about 32 per cent in 4QFY19.

Reliance Jio Incomm Ltd has continued to remain aggressive in subscriber acquisition and has become the largest player in terms of subscribers and revenue.

Competition risk still persists in the sector which may put VIL's market share at continued risk. India Ratings believes the subscriber base is unlikely to show a meaningful recovery in the near-to-medium term, given the sustained competitive pressures, it said.

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