VODAFONE IDEA: Market share loss continues

(IDEA IN, Mkt Cap USD4.6b, CMP INR8, TP INR8, Neutral)

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VIL reported a 2% QoQ decline in EBITDA (pre Ind AS-116), despite a 3% ARPU growth, attributed to the tariff hike. However, the combination of accelerated subscriber churn and higher network cost exerted an adverse impact on earnings. Capex remained low as the management awaits the necessary fund raise.
VIL continues to lose market share even as it followed Bharti in raising tariffs in the minimum recharge category. Management indicated that it is in the advanced stages of fundraising, with one of the promoters having already confirmed their financial support for the upcoming debt repayments. However, the liquidity situation continues to appear bleak, given that there is a scheduled debt repayment of INR70b in FY24, while EBITDA stands at INR87b (pre IND-AS 116). We reiterate our Neutral rating on the stock.

Net loss widens; subscriber loss continues

Revenue grew 1% QoQ to INR107b (in line), led by a 3% QoQ ARPU growth, while the subscriber base declined 2% QoQ (down 4.5m) to 221m. Bharti/RJio saw an increase in ARPU by 4%/1% QoQ to INR200/INR181 and subscriber adds of 3m/9m.
The reported EBITDA declined 1% QoQ to INR42b (in line), led by higher network expenses (up 100bp QoQ) and higher customer acquisition cost. Reported EBITDA margin declined 100bp to 39%.
EBITDA (Pre IND-AS 116) declined 2% QoQ to INR20.2b (in line).
Net loss widened to INR78b vs. INR64b in 4QFY23 (14% miss, led by higher finance cost).
Net debt remained elevated at INR2,115b, with Spectrum and AGR-related debt constituting INR2t (95% of total debt), while market debt amounts to INR 95b (4%).
Capex spend decreased QoQ to INR4.5b vs. INR5.6b in 4QFY23. Bharti/RJio’s annual network capex has been INR280b/INR400b, significantly above VIL, despite possessing higher capacity.

Highlights from the management commentary

VIL has taken price action in the minimum recharge category in 11 circles, reducing validity for INR99 plan to 15 days from 28 days and increasing the entry-level plan to INR127 in the Haryana circle.
It reiterated the need for tariff increase, particularly for higher-tier plans. VIL indicated that it is not in a position to take the lead and will await peers’ decisions to drive any tariff hikes.
In the absence of investment in a) expanding 4G coverage and b) initiating 5G investment, the company is unable to arrest the market share loss. Capex guidance is largely dependent on funding.
The expected cash outflow could predominantly be covered through organic growth and the promoter’s support of INR 20b. Expect the bank debt to decrease over the coming quarters, and the company will be able to pay the INR70b of annual repayment in the current fiscal year.

Valuation and view

VIL has experienced a continued rise in ARPU, due to elevated renewal rate and a shift to 4G. However, there has been a notable increase in subscriber churn during this period.
The completion of share issuance to the Government has brought about clarity and marked a positive progression toward the essential fundraising efforts for the INR70b debt repayment scheduled in FY24. This, along with the capex directed toward the rollout of 4G and 5G, holds significant importance. Thus, the much-awaited capital raise continues to be crucial, as it is essential to ensure immediate liquidity and facilitate the expansion of the network.
Further, it still holds a debt of INR2.1t with an annual installment of INR430b from FY26 onwards. This looks challenging with INR87b EBITDA (IND-AS 116) in FY24.
The significant amount of cash required to service debt leaves limited upside opportunities for equity holders, despite the high operating leverage opportunity from any source of ARPU increase. The current low EBITDA will make it challenging to service debt without an external fund infusion. Assuming 12x EV/EBITDA, with a net debt of INR2.1t, leaves limited opportunity for equity shareholders. We reiterate our Neutral rating on the stock.

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