Vodafone Idea Rating ‘Neutral’; net debt at Rs 1.9 lakh crore

Management Commentary Highlights: VIL is focused on investing in 16 priority circles, which contribute 94% of revenue. Focus on High ARPU Subscribers: Aims to grow high ARPU subscriber programs in partnership with OEMs and NBFCs for 4G devices.

The drop in income continues; needs immediate cash support: Adjusted EBITDA (excluding one-off items on pre-Ind AS 116) was Rs 12.8 billion vs. Rs 17.1 billion QoQ. This was attributed to high subscriber churn due to the Covid-led lockdown and falling ARPUs. With an EBITDA (pre-Ind AS 116) of Rs 38.5 billion in 2HFY22E, it will be difficult to invest in the growth of its network and services. Upcoming repayments of: a) NCD Rs 64.7 billion in FY22, b) Deferred spectrum payment of Rs 82 billion, and c) AGR payout. A capital raise or government relief package remains essential to provide immediate liquidity support to service rising net debt of Rs 1.907 billion (including AGR liabilities). We maintain our “neutral” rating.

Management Commentary Highlights: VIL is focused on investing in 16 priority circles, which contribute 94% of revenue. Focus on High ARPU Subscribers: Aims to grow high ARPU subscriber programs in partnership with OEMs and NBFCs for 4G devices.

Tax refund: He received 10 billion rupees in the form of tax refund on 1QFY22. The balance receivable now stands at Rs 58 billion. Tariff change: The company has increased the tariffs of entry-level business postpaid/prepaid plans to Rs 299/Rs 79 from Rs 199/Rs 49. It is generating positive cash from its operations to meet its refunds and its investment requirements. It engages with investors for new financing and conducts parallel discussions with bondholders for refinancing.

Valuation and Viewpoint: Declining subscribers and therefore revenue disproportionately affects EBITDA due to the high fixed cost nature of the business, with inflationary costs rising. This makes any rate hike too difficult to fill the gap in cash flow needs. VIL’s weak liquidity position may force it to rationalize its network investments, as evidenced by reduced capital expenditure intensity and increased churn. Management said it was in discussions with potential investors for the announced $250 billion fundraising, but the timing remains uncertain.

A capital raise or government relief package remains essential to provide immediate liquidity support to service rising net debt of Rs 1.907 billion (including AGR liabilities). With an EBITDA (pre-Ind AS 116) of Rs 38.5 billion in 2HFY22E, it will be difficult to invest in the growth of its network and services. Upcoming repayments of: a) NCD Rs 64.7 billion in FY22, b) Deferred spectrum payment of Rs 82 billion, and c) AGR payout. The only ray of hope, as management has indicated, is the recovery of its subscriber base after the lockdown was lifted on June 21.

The large amount of cash needed to service its debt leaves limited upside opportunities for shareholders, despite the opportunity for high operating leverage from any source of ARPU growth. The current low EBITDA would make it difficult to service the debt without injecting external funds. Assuming 9x EV/EBITDA, with net debt of Rs 1,907 billion (excluding lease debt and AGR debt), this leaves limited opportunities for shareholders. We maintain our “neutral” rating.

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Ann J. Cox