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Revenue down marginally; subscriber loss continues

* Vodafone Idea (VIL) reported a 1%/4% revenue/EBITDA decline sequentially (pre-Ind-AS-116), due to subscriber loss, flat ARPU, and operating deleverage. Overall subscriber loss of 2.5m continued, but data subscribers remained flat.

* The capital raise has led to some respite as the long pending capex and continuous subscriber churn were hurting its operating performance. With the fundraising, the capex was directed towards the rollout of 4G and 5G. We broadly retain our estimates and expect revenue/EBITDA (pre-Ind-AS116) CAGR at 11%/31% over FY24-26. Assuming a 15x EV/EBITDA and a net debt of INR2t, there is limited opportunity for the stock.

Pre-Ind-AS EBITDA declines 4% sequentially

* VIL’s revenue declined 1% QoQ to INR105b (in line), due to a 1% QoQ subscriber loss (2.5m loss). ARPU was flat QoQ at INR146.

* Reported EBITDA declined 3% QoQ to INR42b (in line) and margin contracted 90bp QoQ to 40% due to operating deleverage.

* Pre-Ind-AS EBITDA declined 4% QoQ to INR21b (in line), and margin contracted 60bp QoQ to 20%.

* Interest cost includes two exceptions: a) VIL reversed the interest cost of INR2.63b following the Hon’ble Supreme Court’s pronouncement of a further judgment regarding the waiver of interest on tax and b) INR6.5b towards reversal of interest accruals towards vendors.

* Adj. net loss reduced to INR73b from INR77b loss on a QoQ basis.

* Net debt reduced INR114b to INR1.96t. This included: 1) Spectrum and AGR debt, which accounted for INR2.1b, and b) market debt at INR47b.

* Capex increased to INR7.6b (from INR5.5b in 4Q) and INR18.5b in FY24.

Highlights from the management commentary

* Tariff-led revenue growth: With the current tariff hike, VIL expects a 17% blended price hike in the prepaid category, which could result in revenue growth at 2/3rd to 3/4th of the hike.

* Churn rate should reduce: VIL expects entry-price subscribers would not see SIM consolidation. However, it will closely monitor the BSNL actions and subscriber movements. It expects the churn rate to come down after the next quarter as the capex deployment will commence.

* Capex guidance intact: Capex guidance continues to remain in the range of INR500-550b over the next three years, with the majority of the capex to be front-ended. Management is in talks with vendors to deploy hardware/sites and expects the discussion to end by Aug/Sep’24.

* Tower additions: Management expects the unique towers to increase to around 210-220k from 183k. There could be some exits in the existing towers, but the 4G towers could reach ~215k (20-25k additions p.a.)

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, there has been an elevated subscriber churn during this period.

* Limited network investments had slowed the customer experience, resulting in subscriber churn. Improvement in network investment 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 toward expanding 4G coverage, 5G launch, capacity expansion, which holds 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 15x EV/EBITDA, coupled with net debt, we derive our TP of INR15. Reduction in AGR liability and restriction in subscriber churn rate could remain the key catalysts for the stock. We reiterate our Neutral rating on the stock.

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