Published on 27/02/2021 10:18:55 AM | Source: Emkay Global Financial Services Ltd

Sell Vodafone Idea Ltd For Target Rs.5 - Emkay Global

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No tariff hike = no fund raise or vice versa?

* VIL reported in-line results, with EBITDA rising 2.6% qoq after adjusting for the oneoffs/change in accounting policy. Shrinkage in subscriber base of 2mn was lower than expectations and compared to average of 10mn loss in the last four quarters.

* In terms of operating parameters, healthy 4G additions came in as the lone positive. Postpaid subscriber base continued to contract with 2.2mn loss in 9MFY21. While the ARPU of Rs121 was below estimates, it was restricted by lower subscriber losses.

* The absence of fund-raise despite company announcing it in Sep’20 and expectation of transaction closure within 3-4 months, is disconcerting, especially considering liquidity challenges. This has restricted 9MFY21 capex spends to just Rs26.1bn.

* We continue to highlight that multiple rounds of tariff hikes, along with potential fund-raise and in turn ramp-up in capex spends, are essential to lift the company from the current gloomy scenario. We maintain Sell with a TP of Rs5 (9x FY23E EBITDA).

…and the challenges persist:

Revenues were in line with our expectations and were driven largely by non-wireless revenues, which rose 13% qoq. Reported EBITDA rose 3.2% qoq on a one-off deferment of subscriber acquisition cost of Rs3.3bn. This is the fourth quarter in which one-offs have positively impacted operating profit. The bottom-line was boosted by an exceptional item of Rs17bn, which was largely due to a gain from the sale of Indus stake. This was offset in part by integration and merger-related costs, provisions for depreciation and amortization and provision for OTSC. Total data volume rose 3.4% qoq, while minutes on the network dipped 1%. Subscriber churn declined to 2.3% from 2.6% in Q2.



Deceleration in the pace of subscriber losses, lower churn and healthy 4G additions were definite positives in the quarter. That said, although sustaining them is crucial, it seems to be a daunting task given constrained capex spends. With peers such as Bharti and Jio already making headway toward 5G, the absence of meaningful capex can potentially be detrimental.

Further, continued delays in fund-raising announcement is surprising, considering the precarious condition of the balance sheet. Bearing in mind the upcoming 4G/5G spectrum auctions, disputed timelines for AGR payment and deferred spectrum obligation starting from FY23E, we believe a single round of fund-raising will be like a “band aid on a bullet hole” and will not be able to meet the impending cash burn of Rs244bn in FY21- 23E - despite assumed tariff hike in FY22E.

Even then, any positive outcome of the petition for the recalculation of AGR dues could be a game-changer and should reduce overhang. Key upside risks: 1) successful fund-raising resulting in capex ramp-up; 2) restricted subscriber losses; 3) downward revision in AGR dues; and 4) faster-than-expected and sustained revenue recovery.


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