Vodafone Idea reported lower margins

Vodafone Idea reported a consolidated loss of Rs 7,295 crore in the June quarter as against Rs 7,312 crore in June 2021. The total revenue stood at Rs 10,410 crore, a YoY growth of 13.7%. The revenue metric improvement was largely a function of residual tariff hike pass-through and one extra day during the quarter, which led to 3.2% QoQ growth. Vodafone Idea’s ARPU for the quarter improve by 23.4 percent YoY to Rs 128, aided by tariff hikes. 

Restricted Competitiveness:

The subscriber base declined from 3.4 million to 240.4 million, with a churn rate of 3.5%. The 4G sub-base saw an addition of merely 0.9 million QoQ to 119 million. Data traffic/MOU increased 4%, 2% QoQ to 5.4 GB, 620 minutes, respectively. Data usage and subscriptions increased 4% year on year to 13.3 GB, but remained lower than peers, who use nearly 20 GB per month. Similarly, capex was at 840 crore vs. 1210 crore in Q4. The management reiterated its intent to raise tariffs by the end of the current calendar year, which will lead to a rise in ARPU. The net debt, at 1.982 lakh crore, was up by 1820 crore QoQ. The net debt includes deferred spectrum liability of 1.166 lakh crore, AGR liability of 67270 crore, and bank borrowing of 15200 crore. While the recent government measures ensure the survival of VIL, staying competitive will be a function of how quickly it raises funds. Substantial fundraising to meet capital spending to expand 4G network coverage, launch 5G and stay competitive  Improvements in subscriber churn and 4G subscriber metrics Many key risks for the company are its inability to raise funds and expand coverage to compete.

The company has acquired mid-band 5G spectrum in 17 priority circles and mmWave 5G spectrum in 16 circles. It has also acquired an additional 4G spectrum in three circles, i.e., in Andhra Pradesh, Karnataka, and Punjab, for 18799 crores, payable in 20 annual instalments of 1681 crores per annum. It did not specify any time frame for the 5G launch. The company expects cash EBITDA to improve as 5G spectrum deployment occurs. It will result in a reduction in SUC charges, while there will be some lower tower rent benefits. The Board of Directors has approved the allotment of 42.77 crore warrants to Vodafone Group on a preferential basis. This, coupled with the earlier preferential raise in Q4 of  4500 crore, takes the total fund infusion by the promoter groups to 4986 crore, largely to pay Indus Tower dues. The company recently agreed to convert interest accrued from the four-year moratorium into equity. It indicated that DoT has confirmed the NPV of Rs 16,300 crore. This equity conversion will lead to dilution with the government owning 33% in VIL and the promoters (Vodafone and Aditya Birla group) owning 50%.

Key Triggers

The outstanding debt will come down by a similar amount, with an annual interest cost savings of Rs 1200 crore from the same. The government also has the discretion to convert total deferred moratorium dues into equity at the end of four years. The guidelines for this are still awaited. VIL remains the weakest private telco. The need for capitalization is urgent, owing to the company’s impending debt repayment, lagging network spending, and continued relative market share loss. It is highlighted that recent government relief measures would ensure the survival of VIL, but the future growth outlook remains uncertain.

Valuations:

In the June quarter, the EPS was Rs. 2.27).The stock is trading at a PE ratio of 86.2x. The EBITDA was at 3.97x with an interest coverage ratio of 0.30x. The stock was trading at Rs. 9.28 on Septembe up by 3.69%.