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Falling cash generation, rising liabilities

Vodafone Idea’s (VIL) Q1FY22 cash EBITDA at Rs13.8bn shows fast deteriorating cashflow, while liabilities are rising; we see high risk and huge concern for VIL. In the wake of growing uncertainties, we have put VIL’s estimates, rating and target price under-review until further clarity. We believe existing operation is unlikely to meet upcoming payouts, and risk of default cannot be ruled out, the much anticipated tariff hike/s and capital infusion have been insufficient. Our previous rating was SELL and target price Rs5, which stands suspended.

* Key variables deteriorated further: VIL had huge sub loss of 12mn when compared to flattish subs base for Bharti and 14.4mn net add for Reliance Jio. The company also lost 4G subs, down 1mn and mobile broadband subs dipped 2.2mn. Post-paid subs base continues to erode, down 3.4% QoQ or 0.7mn in Q1FY22. Gross sub addition was at just 15.4mn (vs 22.3mn in Q4FY21). Minutes decline 4.7% QoQ to 504-bn. The only silver lining was data usage growth of 13.2% QoQ to 5,497bn MB. Mobile broadband sites fell by 5.5k to 447k, while total tower increased to 181k (+190 QoQ).

* Revenue down 4.7% QoQ to Rs92bn. Our working shows VIL’s mobile revenue declined 5.4% QoQ (down 16% YoY on abolition of IUC) to Rs82bn. Mobile revenue was impacted by dip in subs base by 12mn (4.6% QoQ); ARPU fell 2.8% QoQ to Rs104. ARPU was impacted by fall in mobile broadband subs by 2.2mn to 121.4mn (down 1.8% QoQ), and decline in postpaid subs by 0.7mn (down 3.4% QoQ). ARPU should be further impacted by slippages in recharge on lockdown. VIL losing subs base steeply will make its return even tougher; lower investment in network and rising data traffic on network will be worsening user experience. Data usage grew 13.2% QoQ, while mobile broadband sites reduced by 5.5k in Q1FY22.

* Cash EBITDA (adjusted for Ind-AS 116) at Rs13.8bn. EBITDA at Rs37bn was down 16% QoQ (9.5% YoY) partly on Rs4.5bn one-off benefit in Q4FY21. Adjusted for Rs1bn benefit, Q1FY22 annualised cash EBITDA is only Rs51bn, which will fall short significantly to meet the rising liabilities. We see limited room for further cost optimisation measure, and under-investment is already stretching the network. Net loss stood at Rs73bn. Capex investment is curtailed at only Rs9.4bn (10.3% of revenue).

* Piling-up net debt at Rs1,907bn. The figure includes deferred spectrum liability of Rs1,060bn, AGR liability of Rs622bn and bank borrowing of Rs234bn. The liabilities due for payments are 1) annual payment (includes interest) towards AGR liability of Rs90bn in Mar’22; 2) bank guarantee of Rs143bn coming up for renewal (the company has to give additional bank guarantee of Rs10bn) by Oct’22; 3) annual payment towards spectrum due in Apr’22 – of Rs82bn; and 4) bank debt repayment of Rs86.4bn by June’22. The company has filed review petition in the Supreme Court towards AGR liability praying for correcting arithmetical errors. It has also requested the DoT to provide moratorium for spectrum payment, which we believe, only partly solves the problem.

Other highlights

* Sub-base shrunk 4.6% QoQ (net loss: 12mn); VIL has seen accelerated dip in subs-base compared to Bharti Airtel’s nil sub addition in Q1FY22. VIL’s ARPU dipped to Rs104, down 2.8% QoQ, on fall in 4G and postpaid subs and delayed recharges from lockdown. Postpaid subs dipped 0.7mn (down 3.4% QoQ) to 20.2mn.

* 4G sub-base stood at 112.9mn, down 1mn. Mobile broadband subs declined 2.2mn to 121.4mn in Q1FY22, which also included 3G subs. Total data subs fell 3.8mn to 136mn. This compared to growth of 5.1mn 4G subs addition for Bharti.

* Mobile minutes dipped 4.7% QoQ to 504bn, implying a net loss of 25bn minutes QoQ. Minutes per user dipped 2.4% QoQ at 641.

* Data usage rose 13.2% QoQ to 5,497bn MB on 14.3% QoQ growth in data usage per mobile broadband sub. Mobile broadband subs used 15GB data per month.

* Churn rate increased to 3.5% in Q1FY22 (vs 3% in Q4FY21). The company’s gross subscriber addition was at 15.4mn in Q1FY22 (vs 22.3mn in Q4FY21).

* Capex for the quarter stood at Rs9.4bn (10.3% of total revenue).

* Net debt stood at Rs1,836bn, up Rs97bn. Cash balance stood at Rs28bn.

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