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Initiation of the capex cycle

Vodafone Idea (VIL) conducted a call to discuss the key developments. It expects: a) the subscriber churn to reduce from 4Q onwards, since the capex rollout is expected to commence from 3Q, b) debt fundraising of INR350b to conclude in 7-8 weeks, and c) another tariff hike of ~20% next year.

Expect another tariff hike

* The management expects another tariff hike of ~20% (similar quantum of rate hike in Jul’24) between 2QFY26 and 3QFY26.

* It also expects equity conversion to commence once the moratorium ends (i.e. FY26/27).

Progress toward the capex plan – subscriber metrics could improve from 4QFY25

* The company has finalized a deal valued at INR300b with Nokia, Ericsson, and Samsung to supply network equipment. The delivery of the radio equipment is expected to begin in the second half of the upcoming quarter (Nov/Dec’24), followed by the deployment.

* Its radio equipment capex is critical and a substantial part of the capex rollout, which includes expanding 4G coverage and launching 5G.

* This is part of a three-year capex plan worth INR500-550b, where the remaining INR200-250b will be allocated to core and fiber. The company will deploy core and fiber coverage capacity on a need basis.

* Hence, we expect the long pending capex rollout to commence from 3QFY25 onwards and the subscriber metrics to improve from 4QFY25 onwards.

* In order to increase 4G coverage, the company plans to add 215-220k sites, up from the existing total of 170k sites.

Update on the debt fundraising – should conclude in 7-8 weeks

* The company has updated that it is in the advanced stages of discussions to secure loans worth INR350b (INR250b loan + INR100b LC facility).

* The LC facility of INR100b will be used to cover vendor credit for a year.

* SBI Bank has received an evaluation report, allowing banks to proceed with internal processes. Funding is expected to conclude in 7-8 weeks.

Supreme court dismissed the curative petition – VIL engaging with senior government officials

* While the dismissal of the curative petition was the final outcome of the court, the company is engaging with senior government officials to consider remedies.

* The company is in the process of putting together a comprehensive view of the calculation error and will engage with the government again in the coming days regarding those requests.

* The management stated that the long-term business plan was developed without considering any potential benefits in the area of the matter.

Valuation and view

* VIL has experienced a continued rise in ARPU, led by the shift to 4G, higher data monetization, and an increase in minimum recharge vouchers. However, it has experienced an elevated subscriber churn during this period.

* Limited network investments have hindered the customer experience, resulting in subscriber churn. Over the next three years, the company expects to invest INR500-550b in expanding 4G coverage, launching 5G, and increasing capacity, all of which hold significant importance.

* However, it still holds a debt of INR2t with an annual installment of INR430b from FY26 onwards. This looks challenging against the 1QFY25 annualized EBITDA (IND-AS 116) of INR80b.

* The significant amount of cash required to service debt leaves limited upside opportunities for equity holders, despite the high operating leverage opportunity from any source of ARPU improvement. We expect the conversion into equity of unpaid installments post-moratorium to start by FY26/27.

* We are factoring in a revenue/EBITDA CAGR of 11/31% over FY24-26E. Assuming 14x EV/EBITDA, coupled with net debt, we derive our TP of INR12. Restriction in the subscriber churn rate could remain a key catalyst for the stock. We reiterate our Neutral rating on the stock.

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SEBI Registration number is INH000000412