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Good results; tariff hike awaited

Vodafone Idea (VI) delivered a strong Q2FY22 with 4.8% QoQ ARPU growth and 3.3mn 4G subscriber addition leading to marginally betterthen-expected EBITDA. Overall subscriber base continued to decline – down 2.4mn in Q2FY22 versus a drop of 12.4mn in Q1FY22.

While operating performance was good, the company has meagre cash on its books (INR2.5bn) and INR60bn worth of NCD repayments are due from Dec-21 through Mar-22. VI is in discussions with banks and financial institutions for restructuring and capital-raising, but the quantum and timing of capital-raising and tariff hikes will be the determinant of the eventual outcome. Maintain ‘REDUCE’ with a revised TP of INR6 (INR4 earlier) as we roll over to Q4FY23E.

Operating performance improves

VI’s revenue grew 2.8% QoQ to INR94.1bn, above Street’s estimates of INR93.2bn. APRU jumped to INR109, from INR104, led by tariff hikesin few segments. Subscriber base declined by another 2.4mn to 253mn, slightly higher than our estimate of 1mn. However, 4G subscriber base grew by 3.3mn (1mn decline in Q1FY22). Reported EBITDA of INR38.6bn was marginally ahead of Street’s INR38.4bn estimate. EBITDA margin expansion to 41.1% was largely on account of operating leverage. Data volume growth moderated to 0.4% QoQ on a high base of 13.2% QoQ in Q1FY22.

Balance sheet repair requires tariff hike and capital infusion

While the government’s telecom package has eased VI’s burden from a cash flow perspective, the company will require external support for its upcoming INR60bn NCD repayments from Dec-21 to Mar-22 (INR15bn in Q3FY22). There have been multiple media reports around promoter equity infusion, external fund-raising, deferment of Spectrum Fees and License Usage Charges, etc, but none of it has materialised yet. VI continues to suffer from disproportionally higher debt versus EBITDA. We believe this can only be solved by raising funds and hiking tariffs in its core 4G pre-paid segment at the earliest. In the absence of both these steps, the industry might move towards a duopoly, in our opinion.

Outlook and valuation: Still hanging by a thread; retain ‘REDUCE’

With the telecom package has provided VI with some breathing space, the company must undertake tariff hikes and raise funds at the earliest to remain a going concern. The stock is trading at 11.5x FY23E EV/EBITDA. We maintain ‘REDUCE/SU’ with a revised TP of INR6 (from INR4) as we roll over the valuation to FY23E.

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