From Goldman Sachs to ICICI Sec: Why brokerages are bearish on Voda Idea

Vodafone Idea’s (Vi) December quarter results failed to budge brokerages into changing their bearish stance on the stock, even as the telecom operator reported narrowing of losses during the quarter under review.

The debt-ridden telecom firm, on Saturday, reported narrowing of consolidated loss to Rs 4,532.1 crore in Q3FY21, mainly on account of a one-time gain from stake sale in Indus Towers. It had posted a loss of Rs 6,438.8 crore in the same quarter a year ago.

The company’s average revenue per user (ARPU) improved to Rs 121 from Rs 119 on a quarter-on-quarter basis. However, this was still lower than its competitors Bharti Airtel and Reliance Jio that have an ARPU of Rs 166 and Rs 151, respectively. The percentage of customers leaving its network has come down to 2.3 per cent in the third quarter compared to 2.6 per cent churn in the previous quarter. But this figure is down over 11 per cent on a yearly basis.

Irrespective, brokerages believe that fundraise and a tariff hike are of importance and the management has approved raising up to Rs 25,000 crore.

The shares of the firm have gained 26 per cent since the end of September 2020 against a 41 per cent rise in Airtel and a fall of 9 per cent in Reliance Industries, parent of Jio. During the same period, BSE Sensex has gained 37 per cent and BSE Telecom 40 per cent, ACE Equity data show.

Going ahead, analysts see up to 70 per cent downside in shares of and expect them to once again turn into penny stocks i.e. slip below Rs 10.

Here’s a look at what top brokerages said.

| Sell | Target: Rs 3.2 | Downside Potential: 74%

We believe a one-time capital raise would not be a sustainable solution to Vodafone Idea’s balance sheet stress. We estimate the company’s EBITDA would need to be 4x versus December 2020 quarter levels for to be FCF neutral; said differently, its ARPU would need to be higher by c.Rs105, or 1.9x of current levels.

A rise in ARPUs can only be gradual, and thus for to get even close to the required 1.9x levels, the process of increasing tariffs would need to start in the immediate future. Sell rated with 74 per cent potential downside from current levels on our new 12-month target price of Rs 3.2 (from Rs3.3).

| Underperform | Target: Rs 6 | Downside Potential: 51%

Leverage remains unsustainable at 25 times even though it declined from 27 times in the previous quarter with the improvement in EBITDA. Further, we highlight that under-investment continues with capex of mere Rs 970 crore during the quarter and Rs 2,610 crore for entire 9MFY21. We believe that VIL needs meaningful capital infusion on an urgent basis to break out of this vicious loop of underinvestment and market share loss.

ICICI Securities | Sell | Target: Rs 6 | Downside Potential: 51%

VIL remains the weakest private telco. While AGR dues payment extension was a short-term breather, its survival hinges on quick capital infusion and tariff hike implementation. The need for capitalisation is of paramount importance mainly due to its lagging spends on network and relative market share loss. We will monitor triggers like fundraise, tariff hike, before changing our stance.

Emkay Global | Sell | Target: Rs 5 | Downside Potential: 59%

A deceleration in the pace of subscriber losses, lower churn and healthy 4G additions were definite positives in the quarter. That said, although sustaining them is crucial, it seems to be a daunting task given constrained capex spends. Bearing in mind the upcoming 4G/5G spectrum auctions, disputed timelines for AGR payment and deferred spectrum obligation starting from FY23E, we believe a single round of fund-raising will be like a “band-aid on a bullet hole” and will not be able to meet the impending cash burn of Rs 24,400 crore in FY21-23E – despite assumed tariff hike in FY22E. Even then, any positive outcome of the petition for the recalculation of AGR dues could be a game-changer and should reduce overhang.

JM Financial | Sell | Target: Rs 7 | Downside Potential: 43%

While the fundraise of Rs 25,000 crore will help VIL tide over near term liquidity issues, we estimate that VIL would require an ARPU of Rs 200-210 by FY23E to meet its payment obligations. We reiterate Sell rating due to the limited visibility on tariff hikes.

MOSL | Neutral | Target Price: 11 | Downside Potential: 10%

The significant amount of cash required to service its debt, leaves limited upside opportunity for equity holders, despite the high operating leverage opportunity from any source of ARPU increase. The current low EBITDA would make it challenging to service debt without an external fund infusion. Assuming 10 times EV-to-EBITDA with Rs 1.17 lakh crore net debt, it leaves limited opportunity for equity shareholders. We assign an EV-to-EBITDA of 10 times on a FY23E basis to arrive at our target price of Rs 11 per share.

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