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Subscriber loss slows down

Capex of INR500-550b over the three years to support network upgrade

* VIL reported 2% QoQ EBITDA growth (pre-Ind AS-116) in 4QFY24, despite a decline in revenue. EBITDA growth was supported by cost savings in network opex and subscriber acquisition costs, partly offset by high roaming/access costs. The subscriber loss slowed down in 4Q.

* The capital raise has provided some breather to VIL as the long-pending capex and continuous subscriber churn have been affecting its operating performance. With the fund raise, the capex will be directed toward the rollout of 4G and 5G. We have incorporated a tariff hike in our estimates, building ARPU growth of 16% and revenue/EBITDA CAGR of 18/27% over FY24-26E. Assuming 14x EV/EBITDA, coupled with net debt of INR2.1t, leaves limited opportunities for equity shareholders.

Pre-Ind AS EBITDA up 2% QoQ

* Revenue declined 1% QoQ to INR106b (in line), led by 1% QoQ subscriber loss (2.6m loss), partly offset by +1% QoQ ARPU growth to INR146.

* Reported EBITDA was flat QoQ at INR43.3b (in line), while margin improved 10bp QoQ to 40.9%.

* Roaming charges increased 80bp QoQ (% of sales), offset by all the other costs. Network and license costs declined 20bp QoQ each, and subscriber acquisition and other expenses declined 30bp QoQ each.

* Pre-Ind AS EBITDA grew 2% QoQ to INR21.8b (in line) and margin improved 50bp QoQ to 20.6%.

* Adj. net loss remained flat QoQ at INR77b (in line).

* Capex slightly increased to INR5.5b in 4Q (vs. INR3.3b in 3Q) and INR18.5b in FY24. For Bharti/RJio, annual network capex stood at INR331b/INR533b in FY24, significantly above VIL, despite having higher capacity. Net debt declined by INR72b to INR2.1t.

* FY24 revenue/pre-Ind AS EBIDTA grew 1% YoY, while loss remained high.  

* VIL generated OCF of INR121b (up 10% YoY) due to income tax refund. Capex and spectrum payments declined 60% YoY to INR20b (vs. INR55b in FY23). After interest payment of INR29b, FCF stood at INR73b (vs. INR33b in FY23). VIL repaid INR74b of bank debt during the year.  

Highlights from the management commentary

* Capex: It is expected to be in the range of INR500b to INR550b over the next three years for 4G coverage expansion, 5G launch, capacity expansion, and growing the enterprise business. The company expects to start rolling out 5G on a large scale in about six months.

* Debt raise: In discussions with a consortium of banks to raise up to INR250b and additional non-fund based facilities of up to INR100b.  

* AGR petition: The company has filed for INR60b of AGR correction, which together with interest and penalty stands at IRN240b as of Oct’19 and ~INR330b as on Mar’24.  

* Price hikes: Pricing increases may result in some consolidation, but only in dual SIMs or multiple SIMs. However, the company believes the market can absorb the price increase. The price increase may not be as high at the entry level.  

Valuation and view

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

* Limited network investments slowed customer experience, resulting in subscriber churn. Improvement in network investments may take 2-3 years. With this, the company expects to restrict the subscriber churn and grow its data subscriber base.

* The company expects to invest INR500-550b over the next three years in 4G coverage expansion, 5G launch and capacity expansion, which hold significant importance.  

* However, it still holds a debt of INR2.1t with an annual installment of INR430b from FY26 onward. This looks challenging against FY24 annualized EBITDA (INDAS 116) of INR84b.  

* 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 increase. We expect the conversion into equity of unpaid installment post moratorium to start by FY26/FY27.

* We have incorporated a tariff hike in our estimates, building ARPU growth of 16% and revenue/EBITDA CAGR of 18%/27% over FY24-26E. Assuming 14x EV/EBITDA, coupled with a net debt of INR2.1t, derives TP of INR15. The reduction in AGR liability, restriction in subscriber churn, and a potential tariff hike could remain key catalysts for the stock. We reiterate our Neutral rating on the stock. 

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SEBI Registration number is INH000000412