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A small step in the right direction

* VIL saw a healthy flow through of Dec’21 tariff hikes – with cumulative increase of ARPU and EBITDA at 14% and 20% over 2QFY22-4QFY22, respectively, significantly better than the previous tariff hikes when the revenue/EBITDA flow through was notably lower. Additional equity infusion from promoter too aided in fulfilling NCD repayments of INR50b.

* The subscriber churn, though, still continues. Further, its 4QFY22 annualized Adj. EBITDA of below INR80b is not sufficient to fulfill its FY23E repayments. Yet, VIL is spending intensively on network capex to retain market share. Therefore, the much awaited capital raise remains critical in providing immediate liquidity even after the tariff hikes. Maintain Neutral.

Healthy flow through from tariff hikes

 VIL’s revenue grew 5.4% QoQ to INR102.4b (in-line) aided by 8% tariff-led ARPU improvement but partly offset by subscriber churn.

 EBITDA (on Pre IND AS 116 basis) improved 22% QoQ to INR19.7b (adj. for INR1.5b one-off) v/s INR16.2b in 3QFY22 (in line). Incremental EBITDA margin stood at a healthy 68%.

* Net loss was at INR65.6b v/s INR72.3b in 3QFY22 (beat). Adj. net loss came in at INR65.5b.

* VIL’s overall/active subscriber loss continued at 3.4m to 243.8m/226.1m.

* Capex stood at INR12.1b v/s INR10.5b in 3QFY22, significantly below Bharti/ RJio’s capex.

* Net debt stood at INR1,964.2b (v/s INR1,974.8b in 3QFY22), with a cash balance of merely INR15b as the promoter infused INR45b equity that helped towards ~INR50b of NCD repayments.

Highlights from the management commentary

* Management expects ARPU to reach INR200 in the near term and INR250 in the long term aided by premiumization and another round of tariff hikes.

* Expects EBITDA to improve on the back of improved 4G adoption, customer mix improvement and another round of tariff hikes.

* The NPV of equity conversion of deferred liability is confirmed by DOT, amounting to ~INR161.3b and will be completed in the coming weeks.

* VIL has INR81.6b of debt to be repaid over the next 12 months, which will be paid through internal accruals and refund of bank guarantees received.

Valuation and view

* The tariff hikes saw 14% ARPU increase over the last two quarters, driving EBITDA growth, but the recurring subscriber churn has stressed its competitive positioning in the market and network capabilities as well as continues to dilute the earnings growth needed to become self-sustainable.

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

* The recent government moratorium has partly released repayment woes for the next four years, but it has ceded a significant 33% equity stake for merely the interest component with net debt swelling to INR1,964.2b.

* The much awaited capital raise remains critical to provide immediate liquidity and investment in network given the low INR96.3b EBITDA (pre-IND-AS 116) in FY23E, even after the tariff hikes.

* The significant amount of cash requirement to service 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 challenging for VIL to service debt without external fund infusion. Assuming 9x EV/EBITDA with INR1,964.2b net debt leaves limited upside. Maintain Neutral.

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