VODAFONE IDEA: Subscriber loss slows down

(IDEA IN, Mkt Cap USD6.8b, CMP INR12, TP INR11, 6% Downside, Neutral)

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– VIL reported 2% QoQ growth in EBITDA (pre Ind AS-116) in 2QFY24, led by 2% ARPU growth and a decrease in subscriber acquisition costs. Its subscriber base continued to decline, but at a slower pace of 1.6m in 2Q vs. average 4m loss in the last six quarters. Capex remained low as the management awaited the necessary fund raise.

– VIL continues to lose market share, partly accentuated by tariff hikes in the minimum recharge category. Its efforts for fundraise are at an advanced stage, with a confirmation of INR20b in financial support by one of the promoters. However, the liquidity situation continues to appear bleak, given that there is a scheduled debt repayment of INR72b as of Sep’24. EBITDA (pre IND-AS 116) stood at INR88b in FY24. We reiterate our Neutral rating on the stock.

Net loss widening

– Revenue grew 1% QoQ to INR107b (in line), led by 2% QoQ ARPU growth (INR142). The subscriber base declined 1% QoQ (down 1.6m) to 220m.

– Reported EBITDA grew 3% QoQ to INR43b (in line), led by a decrease in subscriber acquisition costs. EBITDA margin improved 100bp QoQ to 40%.

– Pre Ind-AS EBITDA grew 2% QoQ to INR20.6b (in line) and margin improved 20bp QoQ to 19.2%.

– Net loss widened to INR87b vs. INR78b in 1QFY24, led by higher finance costs and tax (26% miss).

– Net debt remained high at INR2.1t, including spectrum/AGR related debt of INR2t (95% of total debt) and market debt of INR79b (4%).

– Capex remained at INR5.2b vs. INR4.5b in 1QFY24. Bharti/RJio’s annual network capex stood at INR280b/INR400b, significantly above VIL, despite higher capacity.

Highlights from the management commentary

– In Aug’23, VIL took a price action in the minimum recharge category in total 15 circles (vs. 4 circles in 1Q) by reducing the validity of its INR99 plan to 15 days from 28 days. The full effect of this action will be reflected in 3QFY24.

– 5G capex is heavily dependent on funding. Currently, the management is focusing on equity investments, including INR20b in promoter funding, and will eventually contact banks.

– The impact of SIM consolidation is decreasing and the industry is witnessing subscriber growth.

– A debt repayment of INR71.4b is due until Sept’24, with INR16b related to ATC, whose timelines are under negotiation, while the rest being mainly bank debt.

Valuation and view

– VIL has seen a consistent rise in ARPU owing to a high renewal rate and a shift to 4G. However, there has been a notable increase in subscriber churn during this period.

– Capex on the rollout of 4G and 5G holds significant importance. Thus, the much-awaited capital raise is 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 onward. This looks challenging with FY25E EBITDA (IND-AS 116) of INR118b.

– The need for a significant amount of cash 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 level of EBITDA will make it challenging to service debt without an external fund infusion. Assuming 15x 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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