Published on 19/01/2021 10:51:16 AM | Source: Motilal Oswal Financial Services Ltd

Update On Vodafone Idea Ltd By Motilal Oswal

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Financial conditions remain fragile; subs loss continues

* Vodafone Idea (VIL)’s adjusted EBITDA (pre-Ind-AS 116) was up 6% QoQ to INR16.3b. Revenue edged up 1% QoQ (in-line) and ARPU improved 4%, offset by continued subscriber churn.

* With ballooned net debt of INR1,145b (incl. AGR liability) and meager INR17b quarterly EBITDA (3QFY21 pre-Ind-AS 116), we maintain VIL Under Review until there is further clarity on the liquidity situation improving.


EBITDA up 6% QoQ (11% beat); subs decline slower, but persists

* VIL’s revenue grew 1% QoQ to INR108b (in-line), as a 4.4% QoQ rise in ARPU to INR119 was offset by continued decline in the subscriber base.

* EBITDA was up 1% QoQ to INR41.5b (11% beat). Adj. EBITDA (on pre-Ind-AS 116) was up 6% QoQ to INR16.8b (11% beat) – excluding an INR3b one-off in 1Q/2QFY21. Opex management has been commendable – opex fell 13% YoY and came in flat QoQ.

* Net loss came in at INR72b v/s INR254b in 1QFY21. Adjusted net loss (for exceptional) came in at INR64.5b on a post-Ind-AS 116 basis v/s INR55b in 1QFY21 (est. INR59b). VIL recognized a charge of INR7.6b as an exceptional item toward integration and merger costs, the impairment of assets, and one-time spectrum charges.

* VIL lost 8m customers (-3% QoQ) to reach 271.8m (in-line); active subs declined even more sharply by 11.8m to 261.2m. Although gross adds improved with the gradual resumption in Retail, churn increased to 2.6% in 2QFY21 (v/s 2% in 1QFY21), dragging down the subscriber base. Bharti added 14m subscribers, indicating a big market share capture from VIL.

* Data/Broadband subscribers increased by a meager 1.8m/3.4m in 2QFY21 to 137.5m/119.8m. This was still better than decline of 6m/2m seen in the last two quarters.

* 4G subs stood at 106.1m, implying a 1.5m increase (v/s -1m in 1QFY21). This was once again better, but far from Bharti’s 14.5m adds.

* ARPU was up 4.4% QoQ to INR119 v/s 6% decline in 1QFY21 (v/s 3% QoQ growth in Bharti on strong subs adds).

* Data traffic grew 7.7% QoQ to 4.8b GB; MOUs declined marginally (0.7% QoQ) to 673mins. Data usage/subs was up 5% QoQ to 11.5 GB. Bharti data usage/subs was at 16.4 GB.

* Capex intensity increased to INR10.4b in 2QFY21 (v/s INR6.0b in 1QFY21), post low capex during the lockdown. This was far lower than Bharti’s INR65b/INR110b in 2QFY21/1HFY21.


Highlights from management commentary

* Tariff and floor pricing – Strongly believe, based on engagement with the new TRAI chairman, that the floor pricingmight be taken into considerations. Alternately, VIL would not hesitate to take the first step on tariff hikes.

* Rebranding – Consistency of execution and synergy would be enhanced under the integrated ‘Vi’ brand and efficiency improved.  Capex – Significant capacity has been created and hence high capex in the upcoming quarters is unlikely; capex would be the same as 2Q levels.

* Rationalize major investments in 16 circles – VIL would drive priority 4G investments in 16 circles to boost revenues and subscriber growth. However, it would continue to make only the necessary investments in the other 6 circles.


Valuation and view

* VIL had a weak cash position of INR17.2b and outstanding gross debt of INR1159b as of 2QFY21. It reported annualized EBITDA of INR65b, and an additional INR14b is yet to be received from the Indus stake sale. This raises the need for immediate fund infusion. Although the board has approved an INR250b fundraising program, management indicated a two- to three-month timeline, with limited visibility.

* With continued churn in subscribers due to network quality issues, improvement in ARPU is not translating into revenue benefits. VIL is losing its competitive positioning with the continuous subscriber churn. Furthermore, a weak liquidity position has restricted its ability to invest in networks, which has led VIL to focus on 16 out of 22 circles. This could limit growth and further erode its competitive position. While the previous price hike has had a limited benefit, if we assume no market share loss, our workings indicate VIL needs a ~70% ARPU hike merely to fulfill its interest obligation, capex, and AGR installment dues in FY22.

* Maintain Under Review: The significant cash requirement to service debt leaves limited upside opportunity for equity holders. We expect INR109b of pre-Ind-AS 116 EBITDA in FY22E. With finance cost of INR141b, servicing debt would prove challenging – unless there is debt restructuring with the lenders. Assuming 7x EV/EBITDA and INR1,145b net debt (including AGR liability) leaves limited opportunity for shareholders. Given the highly uncertain environment, we maintain the stock Under Review until we have clarity on the company’s business continuity.


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