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Fall in earnings continues; needs immediate liquidity support

* Adjusted EBITDA (excluding one-offs on pre Ind AS 116) stood at INR12.8b v/s INR17.1b QoQ. This was attributed to the sharp subscriber churn due to the COVID-led lockdown and fall in ARPUs.

* With EBITDA (pre-Ind AS 116) of INR38.5b in 2HFY22E, it will be challenging to invest in growing its network and service upcoming repayments of: a) INR64.7b NCDs in FY22, b) INR82b deferred spectrum payment, and c) AGR installment. A capital raise or government relief package remains critical to provide immediate liquidity support to service the ballooning net debt of INR1,907b (including AGR liabilities). We maintain our Neutral rating.

Adjusted EBITDA declined sharply to INR12.8b v/s INR17.1b in 4QFY21 on subscriber/ARPU weakness

* Revenue declined by 4.7% QoQ to INR91.5b (2.5% miss) on account of the slowdown in economic activity due to lockdown restrictions in most districts during the second COVID wave. ARPU/subscriber fell 2.8%/4.6% QoQ. The management attributed it to disrupted economic activity and restricted store timings.

* Reported EBITDA fell 15.9% QoQ to INR37.1b (7% miss) as network expenses grew 17% QoQ. Adjusted for INR1b one-off, pre Ind AS 116 EBITDA declined sharply to INR12.8b v/s INR17.1b in 4QFY21.

* Net loss stood at INR73.2b v/s INR70.2b in 4QFY21 (11.4% miss). Adjusted net loss (for exceptional) stood at INR74.9b, a 24% QoQ increase (14.2% above our estimate).

* VIL’s overall/active subscriber loss widened to 12.4m/14m (~5%) to 255.4m. This is much greater than the 1-2m fall seen in the last two quarters, and is in line with the 11.3m decline in 1QFY21 (previous lockdown).

* Data/4G subscribers too declined, though at a slow pace, by 4m/1m after seeing a growth in the last three quarters

* ARPU, at INR104, saw a 2.8% QoQ decline.

* Capex spend in 1QFY22 fell to INR9.4b v/s INR15.4b/INR41.5b in 4Q/FY21. In comparison, Bharti India’s mobile capex was ~4x at INR43.7b in 1QFY22.

* Net debt stood at INR1,906.7b, with a cash balance of a mere INR9.2b. Gross debt (excluding lease liabilities) stood at INR1,915.9b, of which deferred spectrum debt is INR1,060.1b. AGR liability stood at INR621.8b, while bank debt stood at INR234b. This has increased by INR107b since 4QFY21 due to: a) accounting of interest accrued, but not due, towards deferred spectrum liabilities and AGR, and b) recent spectrum purchases.

Highlights from the management commentary

* VIL is focusing on investments in 16 priority circles, which contribute 94% of revenue.

* Focus on high ARPU subscribers: It aims to scale up higher ARPU subscriber programs in partnership with OEMs and NBFCs for 4G devices.

* Tax refund: It received INR10b in the form of tax refunds in 1QFY22. The balance receivable now stands at INR58b.

* Tariff change: The company increased tariffs on entry-level corporate postpaid/prepaid plans to INR299/INR79 from INR199/INR49.

* It is generating positive cash from operations to meet its repayments and capex requirements. It is engaging with investors for new funding, and is conducting parallel discussions with bondholders for refinancing.

Valuation and view

* The fall in subscribers and subsequently revenue is disproportionately hurting EBITDA due to the high fixed cost nature of the business, with inflationary cost increases. This is making any tariff hike too difficult to fill the gap of cash requirements.

* VIL’s weak liquidity position may force it to rationalize network investments, as is evident from reducing capex intensity and intensifying subscriber churn.

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

* A capital raise or government relief package remains critical to provide immediate liquidity support to service the ballooning net debt of INR1,907b (including AGR liabilities).

* With EBITDA (pre-Ind AS 116) of INR38.5b in 2HFY22E, it will be challenging to invest in growing its network and service upcoming repayments of: a) INR64.7b NCDs in FY22, b) INR82b deferred spectrum payment, and c) AGR installment.

* The only silver lining, as the management indicated, is the recovery in its subscriber base post the lifting of the lockdown in Jun’21.

* 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. The current low EBITDA would make it a challenge to service debt without external fund infusion. Assuming 9x EV/EBITDA, with INR1,907b net debt (excluding lease liability and AGR debt), it leaves limited opportunity for equity shareholders. We maintain our Neutral rating.

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