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3Q operationally weak; downgrade to sell

* Vodafone Idea’s (Vi) reported EBITDA (up 4% QoQ, vs. 3%/9% QoQ growth for RJio/Bharti India wireless) came in line with our estimates due to lower employee and SG&A costs.

* However, operationally, results were weaker as subscriber decline remained elevated (-5.2m QoQ vs our estimate of -4m), and reported ARPU came in ~1% below our estimate at INR163 (+5% QoQ vs. 4-5% QoQ growth for peers).

* Vi’s capex increased sharply to INR32b (from INR14b in 2Q). Further, management has guided for INR100b capex for FY25 (vs. INR53b in 9M).

* Vi lost further market share to peers in 3Q, with continued data subscriber churn and weaker customer engagement metrics. Bharti was once again the biggest gainer, with ~80bp/45bp QoQ gains on Revenue Market Share (RMS) and Subscriber Market Share (SMS) in 3QFY25.

* Vi’s continued subscriber loss remains a key concern. Despite accelerated network investments in the interim, we believe regaining subscribers will remain a tall ask for Vi as its peers, with superior free cash flow generation and deeper pockets, can keep customer acquisition costs higher.

* Further, with GoI prepayments commencing from 1HFY26 and no breakthrough on debt raise, we believe Vi is likely to face a cash shortfall and may not be able to meet the capex guidance of INR500-550b by FY27.

* We cut our FY26-27E EBITDA by 7-8% on lower subscriber and ARPU assumptions. We downgrade Vi to Sell (from Neutral) with a revised TP of INR5, based on DCF implied ~14x FY27E EV/EBITDA.

Tariff hike boost partly offset by continued decline in subscriber base

* Vi’s wireless ARPU was up 5% QoQ to INR163 (+10% YoY vs. +4%/+5% QoQ for RJio and Bharti) and was ~1% below our estimate of INR165.

* The company indicated that customer ARPU (excluding M2M) was up ~4% QoQ to INR173 (vs. INR245 for Bharti).

* Vi’s overall subscriber base at 199.8m declined by a further 5.2m QoQ (vs. a 5.1m net decline in 2QFY25 and higher than our expectation of a 4m QoQ decline) due to churn remaining elevated post the tariff hikes.

* Monthly churn was stable QoQ at 4.5% (vs. a decline of ~75bp QoQ for Bharti) and remains a key monitorable.

* Wireless revenue at INR99b (+5% YoY, 2% below) was up 2% sequentially (vs. a 3%/6% QoQ increase for RJio/Bharti) as residual tariff hike benefits were partly offset by a continued decline in subscriber base.

* Reported EBITDA at INR47b (+4% QoQ, +8% YoY) was in line with our estimate due to lower employee costs (-6% QoQ) and SG&A costs (-1% QoQ).

* Pre-Ind-AS 116 EBITDA at INR24.5b improved ~6% QoQ (+15% YoY) and was in line with our estimate as margin expanded ~80bp QoQ to 22% (+200bp YoY and ~35bp higher vs. our estimate).

* Reported losses stood at INR66b (vs. INR72b QoQ and our estimate of INR71b), largely driven by lower net finance costs (11% below, -10% QoQ, certain oneoffs pertaining to vendor dues).

* Vi’s reported net debt (excluding leases but including interest accrued and not due) increased INR55b QoQ to INR2.18t. Vi owes ~INR2.27t to GoI for deferred spectrum and AGR dues. External/banking debt declined further to a modest ~INR23b (vs. INR33b QoQ, INR77b YoY).

Highlights from the management commentary

* Subscriber trends: Management indicated that it is seeing some green shoots from network rollouts, with VLR net adds in 11 circles in Dec’24 and Jan’25. Further, it expects trends to improve with the progress on network rollout and the upcoming 5G launch.

* Network rollout: Vi rolled out ~3.5k towers (~4k MBB towers) and ~21k net MBB sites during 3Q, leading to an increase in 4G population coverage by a further ~20m to 1.07b. Management expects to reach 4G population coverage of 1.1b by Mar’25 and 1.2b (~90%) over the medium term. Further, the company plans to commercially launch 5G services in Mumbai in Mar’25, followed by launches in Delhi, Bangalore, Chandigarh, and Patna in Apr’25.

* Tariff hike: Management noted that the benefits of tariff hikes are largely reflected in 3Q (~12% customer ARPU growth over the last two quarters). Further, management reiterated its stance on the need for further tariff hikes (possibly in the next 3-6 months) and a change in tariff construct to usage-based plans.

* Debt raise: Vi remains engaged with lenders for a debt raise. Further, management highlighted that recent Bank Guarantee (BG) waivers indicate GoI’s commitment to a three-player market and have helped advance discussions with lenders.

* Network opex: Management indicated that it is looking to expand its tower presence to 215-220k (from ~187k currently). Typically, a new site addition results in a ~60-70k per month increase in network opex. However, there has been some offset from seasonally lower energy costs and green site initiatives in 3Q, which led to QoQ stable network opex.

Valuation and view

* Vi continues to lose market share to peers on account of lower ARPU translation, given its inferior subscriber mix and elevated subscriber churn.

* Vi plans to embark on a significant capex cycle (INR500-550b over the next 2-3 years) to bridge the network gap with peers.

* Despite the likely capex, we believe gaining back subscribers would be a tall ask for Vi, given its peers’ superior free cash flow generation and deeper pockets.

* Further, we believe Vi’s network investments remain contingent on debt raise, which in turn is dependent on continued support/relief from GoI (INR440b+ annual repayments to GoI starting from 1HFY26).

* Stabilization of the subscriber base, along with further relief from GoI, remains imperative for Vi’s long-term survival.

* We cut our FY26-27E EBITDA by 7-8% on lower subscriber and ARPU assumptions. We downgrade Vi to Sell (from Neutral) with a revised TP of INR5, based on DCF implied ~14x FY27E EV/EBITDA.

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