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Higher ARPU offsets subscriber churn

* VIL posted an in line adjusted EBITDA of INR14.1b (excluding INR1.5b one-offs on a pre-Ind AS 116 basis) v/s INR12.8b QoQ on the back of a 5% improvement in ARPU. The improvement was led by a pickup in economic activity and easing of lockdown-related restrictions, tariff improvement, and mix benefit, which offset the 2m subscriber decline.

* The moratorium offered by the government for AGR and deferred spectrum payment has addressed part of the repayment woes. VIL is in talks with banks to fund its upcoming repayments of: a) INR60b in NCDs in FY22, and b) invest in growing its network. With an EBITDA (on a preInd AS 116) of INR33b in 2HFY22E, a capital raise remains critical to provide immediate liquidity. We maintain our Neutral rating.

On a pre Ind AS basis, adjusted EBITDA rose 3% QoQ to INR14.1b on ARPU growth

* Revenue grew 2.8% QoQ to INR94b, aided by: a) a pickup in economic activity and easing of lockdown-related restrictions, b) pricing initiative led ARPU increment, and c) mix improvement.

* Reported EBITDA grew 4.2% QoQ to INR38.6b (4% beat), aided by improvement in revenue, partially offset by an increase in customer acquisition costs due to higher gross additions. On a pre Ind AS 116 basis, EBITDA, adjusted for a one-off gain of INR1.5b, improved by 3% QoQ to INR14.1b v/s INR13.8b in 1QFY22.

* Net loss stood at INR71.3b v/s INR73.2b in 1QFY22 (5.3% beat). Adjusted net loss stood at INR71.4b. VIL has recognized an exceptional item of INR135m towards integration cost.

* VIL’s pace of subscriber losses narrowed to 2.4m (total: 253m) v/s a decline of 12.4m in 1QFY22 (COVID-affected quarter), after a similar decline in 2HFY21.

* Active subscribers too declined by 6m to 235.7m. Data/4G subscribers improved by 0.6m/3.3m, much below Bharti, while RJio saw a large scale clean up in 2QFY22.

* ARPU grew 4.8% QoQ to INR109, recovering from the COVID-led impact and with pricing initiatives.

* Capex spend in 2QFY22 improved to INR13b v/s INR9.4b/INR41.5b in 1QFY22/FY21. Annual capex has been over INR200b for Bharti/RJio, 4x that of VIL, despite having a higher capacity.

* Net debt rose INR39b to INR1,945.3b, with a cash balance of a mere INR2.5b. Gross debt (excluding lease liabilities) stood at INR1,947.8b, of which deferred spectrum debt is INR1086.1b, AGR liability is INR634b, and bank debt is INR227.7b.

Highlights from the management commentary

* ARPU hike: The management expects the 2G to 4G mix led ARPU improvement to continue. It expects a positive decision on floor plans in the next few weeks.

* 5G trial: It clocked strong speeds during the tests. The management expects spectrum pricing to reduce. It also tested spectrum in the E band, which could reduce its fiber investments.

* Fundraise: VIL is in active discussions with banks/investors and expects to complete the fund raising process before the end of FY22. The recent relief package will reduce its bank guarantee to 20% of current levels.

* It plans to become a Tech company from a Telecom company, with a new range of offerings like VI integrated IoT, VI Cloud firewall, and bundled solutions. It also plans to launch a host of digital services through partnership in entertainment, gaming, etc. Valuation and view

Valuation and view

* The pace of subscriber decline reduced, but the continuous churn in subscribers is making it challenging to sustain EBITDA, leave alone growth. VIL’s weak liquidity position may force it to rationalize network investments, as evident from the lower capex intensity, which poses a risk of continued subscriber churn.

* It saw healthy (4%) improvement in ARPU in 2QFY22, led by a recovery from the COVID-led lockdowns and pricing initiatives in minimum plans and postpaid tariffs.

* The government relief package offered respite for the next four years from over INR200b in annual repayment, though it will be challenging to service the debt along with the accumulated interest.

* With an EBITDA (pre Ind AS 116) of INR33b in 2HFY22E, it will be challenging to service the upcoming repayments of: a) INR60b NCDs in FY22, and b) invest in growing its network. An immediate capital raise remains critical to provide immediate liquidity support, even as the management indicated that it is engaging with banks and investors.

* The recent government relief package provides optimism that there may be a tariff hike to sustain profitability, improve cash flows, and attract capital.

* But 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 challenging to service debt without an external fund infusion. Assuming 12x EV/EBITDA with INR1.9b net debt, leaves a limited opportunity for equity shareholders. We maintain our Neutral rating.

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