Vodafone Idea Rating ‘Neutral’; net debt at Rs 1.9 lakh crore

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The significant amount of cash required to service its debt, leaves limited upside opportunity for equity holders, despite the high operating leverage opportunity from any source of ARPU increase.The significant amount of cash required to service its debt, leaves limited upside opportunity for equity holders, despite the high operating leverage opportunity from any source of ARPU increase.

Fall in earnings continues; needs immediate liquidity support: Adjusted EBITDA (excluding one-offs on pre Ind AS 116) stood at Rs 12.8billion v/s Rs 17.1billion QoQ. This was attributed to the sharp subscriber churn due to the Covid-led lockdown and fall in ARPUs. With EBITDA (pre-Ind AS 116) of Rs 38.5billion in 2HFY22E, it will be challenging to invest in growing its network and service upcoming repayments of: a) Rs 64.7billion NCDs in FY22, b) Rs 82billion deferred spectrum payment, and c) AGR installment. A capital raise or government relief package remains critical to provide immediate liquidity support to service the ballooning net debt of Rs 1,907billion (including AGR liabilities). We maintain our ‘neutral’ rating.

Highlights from the management commentary: VIL is focusing on investments in 16 priority circles, which contribute 94% of revenue. Focus on high ARPU subscribers: It aims to scale up higher ARPU subscriber programmes in partnership with OEMs and NBFCs for 4G devices.

Tax refund: It received Rs 10billion in the form of tax refunds in 1QFY22. The balance receivable now stands at Rs 58billion. Tariff change: The company increased tariffs on entry-level corporate postpaid/prepaid plans to Rs 299/Rs 79 from Rs 199/Rs 49. It is generating positive cash from operations to meet its repayments and capex requirements. It is engaging with investors for new funding, and is conducting parallel discussions with bondholders for refinancing.

Valuation and view: The fall in subscribers and subsequently revenue is disproportionately hurting EBITDA due to the high fixed cost nature of the business, with inflationary cost increasing. This is making any tariff hike too difficult to fill the gap of cash requirements. VIL’s weak liquidity position may force it to rationalise network investments, as is evident from reducing capex intensity and intensifying subscriber churn. The management said it is in discussion with potential investors for the stated `250billion fund raise, but the timeline remains unclear.

A capital raise or government relief package remains critical to provide immediate liquidity support to service the ballooning net debt of Rs 1,907billion (including AGR liabilities). With EBITDA (pre-Ind AS 116) of Rs 38.5billion in 2HFY22E, it will be challenging to invest in growing its network and service upcoming repayments of: a) Rs 64.7billion NCDs in FY22, b) Rs 82billion deferred spectrum payment, and c) AGR installment. The only silver lining, as the management indicated, is the recovery in its subscriber base post the lifting of the lockdown in Jun’21.

The significant amount of cash required to service its debt, leaves limited upside opportunity for equity holders, despite the high operating leverage opportunity from any source of ARPU increase. The current low EBITDA would make it a challenge to service debt without external fund infusion. Assuming 9x EV/EBITDA, with Rs 1,907billion net debt (excluding lease liability and AGR debt), it leaves limited opportunity for equity shareholders. We maintain our ‘neutral’ rating.

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