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Liquidity a major concern; fund raise awaited

* VIL posted an adjusted EBITDA of INR17.1b (excluding an INR4.5b one-off on a pre Ind AS 116 basis), down 5% QoQ (16% miss) on continuing subscriber churn and weak ARPU.

* Upcoming debt repayments of INR60b in FY22 and INR82b deferred spectrum payments require an immediate liquidity support. EBITDA (pre Ind AS 116) of INR88b in FY22E makes it challenging to service its net debt of INR1,190b (excluding AGR and lease liability) and invest in its network. We maintain our Neutral rating.

Adjusted EBITDA fell 5% QoQ to INR17.1b; subscriber loss slows down

* Revenue fell 11.8% QoQ to INR96.1b (in line), led by an 11.6% decline in ARPU to INR107. Subscriber base declined marginally (0.7%) QoQ. The management attributed the steep decline to: a) 9.6% impact on abolishment of IUC, effective 1st Jan’21, and b) 2.2% impact due to lower number of days in 4QFY21. Adjusted for the same, revenue was flat QoQ.

* Reported EBITDA grew 2.9% to INR44.1b (4.2% beat) as SG&A fell 32% QoQ. Excluding a one-off expense of INR4.5b related to network and IT cost, adjusted EBITDA stood at INR17.1b. This is 5% lower QoQ, factoring the INR3b one-off in 3QFY21.

* Net loss stood at INR70b v/s INR45b in 3QFY21. Adjusted net loss (for exceptional items) stood at INR60.5b (in line) on a post Ind AS 116 basis v/s a loss of INR62.3b in 3QFY21.

* VIL lost 2m subscribers in 4QFY21 (-0.7% QoQ), taking its total count to 269.8m. This is similar to 3QFY21 as against an 8m/11m decline in 2Q/1Q. Active subscribers continued to decline, though at a much lower pace (0.9m) to 255.7. This is much lower than the cumulative loss of 37m in 9MFY21. Gross additions improved further to 6m, after turning positive (4.2m) in 3QFY21, though the churn has increased to 3% v/s 2.3% QoQ.

* 4G subscribers rose by 4.2m v/s 3.6m in 3QFY21, taking its total count to 113.9m. This is better, but far off from Bharti/RJio’s additions of 13.7m/15.4m. The increase was mainly from a shift in 3G subscribers as overall data/broadband subscribers were flat. Broadband subscribers increased by 2.8m v/s 1m in 3QFY21.

* ARPU fell by 11.6% QoQ to INR107 due to an IUC impact. Adjusted for the same, ARPU was broadly flat. Bharti’s ARPU fell 1% QoQ to INR145.

* Capex spend in 4Q rose to INR15.4b v/s INR9.7b in 3QFY21. Total capex spend in FY21 stands at INR41.5b v/s INR197b for Bharti (~5x higher).

* Net debt stood at INR1,799.6b, with a cash balance of a mere INR3.5b. Gross debt (excluding lease liabilities) stood at INR1,803.1b. Of this, deferred spectrum debt is INR962.7b, AGR liability at INR609.6b, and bank debt at INR230.8b.

Highlights from the management commentary

* Tariff hike: VIL feels floor pricing is the best way to fix pricing issues in the sector. The new plans by all telcos is a step towards rationalizing pricing.

* Network management: It is focusing on investments in 16 priority circles, which constitute 94% of revenue. It is re-farming its 3G spectrum to debottleneck its network.

* Liquidity management: Out of total tax refunds of INR83b, INR15b has been received. It expects INR30b in FY22. This, along with a divestment of surplus land, will be utilized to manage liquidity.

Valuation and view

* Upcoming debt repayments of INR60b in FY22 and INR82b in deferred spectrum payments require immediate liquidity support. EBITDA (pre Ind AS 116) of INR88b in FY22E makes it challenging to service its net debt of INR1,190b (excluding AGR and lease liability) and invest in its network.

* The management said it is in discussion with potential investors for the INR250b fund raise, but the timeline remains unclear.

* Continued subscriber churn has diluted the benefits of previous tariff hikes. It saw an ARPU improvement of 13% (over 2QFY20-3QFY21) v/s industry wide price hikes of ~25%.

* VIL’s weak liquidity position restricts its capability to invest in network improvement, as evident from its reducing capex intensity.

* The only silver lining is that gross subscriber additions have continuously picked up in the last couple of quarters to 6m from -1m. 4G subscriber additions have improved.

* Our workings indicate that VIL needs to double its ARPU to service its debt in FY22E/FY23E, assuming no further subscriber churn.

* The significant amount of cash required to service its debt, leaves limited upside opportunity for equity holders, despite the high operating leverage opportunity from any ARPU increase. The current low EBITDA would make it challenging to service debt without an external fund infusion. Assuming 8x EV/EBITDA, with a net debt of INR1,190b (excluding lease liability and AGR debt), it leaves limited opportunities for VIL’s equity shareholders. We maintain our Neutral rating.

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