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Earnings largely in line; long-term sustainability contingent on govt support

Vodafone-Idea’s (VIL) net subscriber (subs) loss was 1mn in 2QFY26, slightly higher than JMFe of 0.5mn net subs loss (vs. 0.5mn net loss in 1QFY26) and 4G/5G subs gain was also lower than JMFe at 0.4mn. However, ARPU (excluding M2M subs) was slightly better and up 1.7% QoQ at INR 180 (vs. JMFe of INR 179) due to 1 more day in the quarter and aided by upgrades and improved subs mix. Access charges and license fees/SUC were higher than JMFe; these were partly offset by lower network costs while SG&A and other costs access charges were in line. Hence, reported EBITDA was marginally better than JMFe/consensus at INR 46.9bn (up 1.6% QoQ) while Pre-Ind AS EBITDA was also up 3% QoQ to INR 22.5bn in 2QFY26. Capex was lower QoQ at INR 17.5bn in 2QFY26 probably due to moderation in 4G network expansion and 5G rollouts amidst delay in INR 250bn debt fundraise. Net debt (excluding lease liability) rose by INR 56bn QoQ to INR 1,999bn at end-2QFY26. We have raised our TP to INR 11 (from INR 9.5) assuming ~INR 160bn relief from the government in relation to VIL’s AGR dues. We maintain ADD on VIL. Sharper-than-expected tariff hikes, strong subscriber growth and significant debt waiver from government and VIL’s subscriber growth being significantly above our assumption are upside risks to our estimates and valuation. However, there could be downside risk to our estimates/valuation if a) government provides lower AGR relief/waiver; b) VIL is not able to arrest its subscriber decline; and/or c) tariff hikes are lower than expected.

* Wireless revenue in line with JMFe at INR 98.8bn with ARPU slightly better at INR 180 while 4G/5G subs gain slightly lower (0.4mn): VIL’s net overall subs loss (inclusive of M2M subs) was slightly higher at 1mn in 2QFY26, vs. JMFe of 0.5mn (vs. 0.5mn in 1QFY26) – management attributed this to seasonality. Further, adjusted for M2M subs gain of 0.7mn (as per TRAI subs data for Jul-Sep'25), VIL's net wireless subs loss could be even higher at ~1.7mn in 2QFY26. This compares to Jio’s LFL wireless subs addition of ~3.1mn (Jio reported overall subs addition of 8.3mn including Home and M2M subs; TRAI subs data for Jul-Sep'25 suggests that Jio added ~3.1mn wireless subs, ~2.6mn M2M subs and ~2.7mn homes subs) and Bharti's wireless subs addition of 1.4mn in 2QFY26. Further, VIL's 4G/5G subs gain was also slightly lower at 0.4mn (vs. JMFe of 1mn). Further, VIL's ARPU (including M2M subs) was in line with JMFe at INR 167 in 2QFY26 while ARPU (excluding M2M subs) was slightly better at INR 180 in 2QFY26 vs. JMFe of INR 179 (up 1.7% QoQ due to 1 more day QoQ in 2QFY26 and aided by upgrades and improved subs mix). This compares to Jio’s 2QFY26 ARPU being up 1.2% QoQ at INR 211.4 (including FTTH) and ~INR 200 (excluding FTTH) and Bharti Airtel’s ARPU, which grew by 2.4% QoQ to INR 256, and Bharti Hexacom’s ARPU, which grew by 2% QoQ to INR 251 in 2QFY26. Further, VIL's data usage per subscriber grew 6.8% QoQ to 18.5GB/month in 2QFY26. Hence, VIL’s wireless revenue was largely in line with JMFe at INR 98.8bn.

* Reported EBITDA marginally better than JMFe/consensus at INR 46.9bn (up 1.6% QoQ) while Pre-Ind AS EBITDA also up 3% QoQ to INR 22.5bn in 2QFY26: VIL’s total revenue was marginally higher than JMFe/consensus at INR 112bn (up 1.6% QoQ) aided by higher implied revenue from the enterprise segment at INR 13.2bn (vs. JMFe of INR 12.2bn and INR 12.2bn in 1QFY26) while wireless revenue was largely in line with JMFe at INR 98.8bn. Further, access charges were higher at INR 11.4bn (vs. JMFe of INR 11.2bn) and license fees/SUC were also slightly higher at INR 9.6bn (vs. JMFe of INR 9.5bn); these were partly offset by lower network costs at INR 23.6bn (vs. JMFe of INR 23.9bn and INR 23.5bn in 1QFY26) while SG&A and other costs were in line with JMFe at INR 14.4bn (vs. INR 14.6bn in 1QFY26). Hence, reported EBITDA at INR 46.9bn (up 1.6% QoQ) was also marginally better than JMFe/consensus; EBITDA margin improved marginally to 41.9% in 2QFY26 (vs. 41.8% in 1QFY26). Pre-Ind AS EBITDA (or cash EBITDA) was at INR 22.5bn (up 3% QoQ, but down 3.4% YoY).

* Capex lower QoQ at INR 17.5bn in 2QFY26 probably due to moderation in 4G network expansion and 5G rollouts amidst delay in INR 250bn debt fundraise: Capex for 2QFY26 was lower QoQ at INR 17.5bn (vs. INR 24.4bn in 1QFY26), probably on moderation in 4G network expansion and 5G rollouts given funding constraint due to continued delay in INR 250bn debt raise. The management guided for capex at INR 75bn-80bn in FY26, independent of any external fundraise as it will be met from internal accruals. Capex will be mix of coverage, capacity, transmission etc. but would prioritise towards expanding network coverage (through 4G and 5G rollouts). It added that the ongoing capex has led to 4G population coverage reaching 84% at end Sep’25 (vs. 77% at end Mar'24) and reiterated its target to reach 90% in the next few quarters (involving incremental capex of ~INR 40bn).

* Net debt (excluding lease liability) rose by INR 56bn QoQ to INR 1,999bn at end-2QFY26: Gross debt (excluding lease liability) rose to INR 2,030bn at the end of 2QFY26 (vs INR 2,011bn at the end of 1QFY26) comprising: a) Govt dues of INR 2,014bn related to deferred spectrum liability of INR 1,223bn and AGR liability of INR 791bn; and b) bank debt of INR 15bn. Further, cash outstanding declined QoQ to INR 31bn (vs. INR 68bn at end 1QFY26) as 4G network expansion and 5G rollout capex continued during the quarter. Net debt-to-EBITDA is currently at 10.7x (annualised) – Exhibit 3. The management shared that it has to meet debt payment obligation of INR 164bn in respect of AGR instalment by end-Mar'26; further, it has to pay spectrum dues of INR 25.6bn and bank debt of INR 14.4bn over the next 1 year by Sep'26.

* Maintain ADD: Following the recent Supreme Court order allowing the government flexibility to decide on VIL’s past AGR dues of ~INR 785bn at end-2QFY26, we have assumed that the government would provide a) partial AGR relief/waiver of ~INR 160bn before end-FY26; and b) extension of moratorium for AGR dues beyond Mar’26, as VIL is not in a financial position to meet AGR dues instalment of ~INR 160bn scheduled by end-Mar'26. However, we have kept our operational estimates unchanged. Hence, our TP has been revised upwards to INR 11 (from INR 9.5). We maintain ADD on VIL. Key monitorables that can pose upside risks to our estimates/valuation are: a) relief from government dues either via higher waiver of AGR dues and/or allowing surrender of pre-2022 spectrum, conversion of more dues to equity and extension of moratorium; b) multiple sharp tariff hikes that can result in VIL’s blended ARPU being significantly above our estimate of INR 183/207/229 in FY26/27/28 vs. INR 167 in 2QFY26; and c) VIL’s subscriber growth being significantly above our assumption of 1% growth p.a. at 200/202/204mn in FY26/27/28 vs. 197mn in 2QFY26. However, there could be downside risk to our estimates/valuation if a) government provides lower AGR relief/waiver; b) VIL is not able to arrest its subscriber decline; and/or c) tariff hikes are lower than expected.

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