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Higher ARPU offsets subscriber churn

* VIL posted a pre Ind AS 116 EBITDA of INR16.2b v/s INR14.1b QoQ (5% above our estimate) on the back of a 5.5% increase in ARPU, led by the recent tariff hike, which resulted in a higher churn at 5.8m.

* The recent government moratorium has partly offered it some respite from its repayment woes, but it has ceded 35% equity stake to the government for just the interest component, with its net debt ballooning to INR1,975b. The much awaited capital raise remains critical to provide immediate liquidity, given the low EBITDA of INR104.1b (pre-Ind AS 116) in FY23E even after the tariff hike. We maintain our Neutral rating.

Revenue up 3% QoQ to INR97b. Pre Ind AS EBITDA up 14% (5% above our estimate)

* Revenue grew 3.3% QoQ to INR97b (in line) aided by a tariff hike, which led to a 5.5% improvement in ARPU.

* It reported an EBITDA decline of 1.2% QoQ to INR38.1b (in line). EBITDA, on a pre Ind AS 116 basis, improved by 14.4% QoQ to INR16.2b v/s INR14.1b (adjusted for one-offs of INR1.5b) in 2QFY22. The same was 5.4% above our estimate led by an improvement in revenue and higher savings on account of a cost optimization exercise, but was partially offset by higher marketing expenses.

* Net loss stood at INR72.3b v/s INR71.3b in 2QFY22 (in line). Adjusted net loss came in at INR72.2b. VIL has recognized an exceptional loss of INR116m towards integration costs.

* Its subscriber base continued to decline by 5.8m (v/s 2.4m in 2QFY22) to 247.2m. RJio saw a subscriber decline of 8.5m in 3QFY22. Both active and data subscribers fell by 0.9m/6.2m, though 4G subscribers grew marginally by 0.8m.

* ARPU grew 5.5% QoQ to INR115 aided by a tariff hike. RJio saw an ARPU increase of 5.6% in 3QFY22.

* Capex stood at INR10.5b v/s INR13b in 2QFY22. The same for Bharti/RJio was over INR200b, or 4x that of VIL, despite the duo having higher capacity.

* Net debt rose INR30b to INR1,975.3b, with a cash balance of a mere INR15b. Gross debt (excluding lease liabilities) stood at INR1989.8b, comprising of deferred spectrum payment obligations of INR1113b, AGR liability of INR646.2b, and debt from banks and financial institutions of INR230.6b.

Highlights from the management commentary

* The management expects the complete benefit of the tariff hike to accrue by 1QFY23 and next another round of price hike to occur before FY23.

* Bank guarantees: It expects a return of bank guarantees of ~INR170b to improve its funding profile.

* Fundraise: The management reiterated that it expects the fundraising process to be completed before the end of FY22.

* Capex: Moratorium, tariff hike, and further bank support/funding are expected to increase capex spends.

Valuation and view

* The much anticipated tariff hike did provide some respite, driving EBITDA growth, but the recurring subscriber churn underscores its competitive position in the market and network capabilities, and continues to dilute the earnings growth needed to become self-sustainable.

* VIL’s weak liquidity position may rationalize network investments, as evident from the lower capex intensity, which poses a risk of continued subscriber churn.

* The recent government moratorium has partly offered it some respite from its repayment woes, for the next four years, but it has ceded significant (35%) equity stake for just the interest component, with its net debt ballooning to INR1,975b.

* The much awaited capital raise remains critical to provide immediate liquidity and invest in its network, given the low EBITDA of INR104.1b (pre-Ind AS 116) in FY23E even after the tariff hike.

* 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 source of ARPU increase. Its low EBITDA would make it challenging to service its debt without an external fund infusion. Assuming 10x EV/EBITDA and a net debt of INR1,975b leaves limited opportunity for equity shareholders. We maintain our Neutral rating.

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