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Operating performance remains weak; urgently needs massive capital infusion

Result Synopsis

Vodafone Idea (IDEA) reported sequentially muted performance for the quarter. The sequential revenue growth was slightly above estimates; while EBITDA margin was below expectation. It reported sequential revenue growth of 2.0% QoQ, led by led by 2.3% QoQ increase in Wireless ARPU for the quarter. While, the number of mobile subscribers decreased by 6mn QoQ to 234mn. There was sequential decline in EBITDA margin(down 298 bps QoQ) led by led by higher network operating cost, partly offset by lower license and spectrum usage cost. Net debt increased to Rs 2.20 trillion vs Rs 1.98 trillion as of Q1FY23.

It continues to lose subscribers(mainly in 2G segment) and that adversely impacts revenue growth. The addition of 4G subscribers remains muted. It needs capital infusion for augmenting the capital expenditure to match up with peers in terms of 4G coverage/capacity. We expect that 2G to 4G migration would continue to drive ARPU growth. We expect EBITDA Margin to improve going ahead led by lower SUC charges and some savings on rental after recent renegotiation with Indus Towers. We estimate revenue CAGR of 14.3% over FY22?24E with average EBITDA margin of 43.0%. We maintain our REDUCE rating on the stock with unchanged target price of Rs 8/share based on EV/EBITDA of 9.5x on FY24E. The stock trades at EV/EBITDA of 12.9x/10.2x on FY23E/FY24E.

Result Highlights

* Reported revenue of Rs 106.1bn( up 2% QoQ, up 12.8% YoY), led by 2.3% QoQ increase in Wireless ARPU for the quarter( Q2FY23 ARPU at Rs 131). While, the number of mobile subscribers decreased by 6mn QoQ to 234mn.

* EBITDA margin declined by 298 bps QoQ to 38.6%, led by higher network operating cost up 15.9% QoQ, partly offset by lower license and spectrum usage cost, down 8.3% QoQ.

* Number of 4G subscribers increased by 1.6mn QoQ to 120.6mn; while average data usage by 4G subscriber increased to 15GB/ month in Q2FY23 from 14.3 GB/ month in Q1FY23.

* During the quarter, it shut down ~19,000 3G sites; while it added ~8,500 4G sites to expand its 4G coverage.

* Net losses increased to Rs 75.6bn vs Rs 73.0 bn in Q1FY23.

* Net debt increased to Rs 2.20 trillion vs Rs 1.98 trillion as of Q1FY23.

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