Recently, international brokerage Goldman Sachs made headlines by reiterating its sell call on debt-laden telecom operator Vodafone Idea. However, savvy internet sleuths dug up VI's recent FPO documents, showing Goldman Sachs participated as an anchor investor in the telco’s offer. So what gives?
On September 6, Goldman Sachs reaffirmed its bearish rating on beleaguered telco Vodafone Idea. The brokerage believes that the country’s third-largest telecom operator will be unable to stop the relentless erosion of its market-share, despite its recent capital raise.
“Our analysis suggests a direct correlation between capex and revenue market share, and given our expectation of peers spending at least 50 percent higher capex versus Vodafone Idea, we forecast another 300 bps share loss for the company over the next 3-4 years,” said Goldman Sachs in its report.
In an optimistic scenario - where the company's adjusted gross revenue (AGR) dues are slashed by 65 percent, tariffs consistently increase, and no near-term government repayments are required - Goldman sees a best-case implied value per share of Rs 19.
The brokerage did hike its price target on Vodafone Idea marginally from Rs 2.2 to Rs 2.5 per share. Regardless, the downside implication of a whopping 83 percent spooked the markets and investors rushed to offload their holdings on the counter, causing the telecom operator’s share price to crash 14 percent on the bourses.
Also Read | Vodafone Idea FPO: 10 things to know about India’s largest follow-on public offer
As the stock price sank in a sea of red, the internet was quick to react. Investors looked at the anchor book for Vodafone Idea’s recent follow-on public offer, where a Goldman Sachs fund was spotted bidding for 81.83 lakh shares at Rs 11 each.
How do we then reconcile the difference? Is it disingenuous, should such transactions be flagged by the regulator? Well, no.
That’s because what we see as Goldman Sachs need not always be Goldman Sachs’s proprietary book! Foreign investors who want to increase their exposure to the domestic markets, but don’t want to undergo the hassle of registering as an FPI with the markets regulator SEBI use ODIs or off-shore derivative instruments.
These ODIs are issued by an FPI, who usually buys or holds the stock or equity that the ODI represents. Goldman Sachs is one such FPI that helps foreign investors put their money into Indian markets.
Remember, these are derivative instruments, the foreign investor is not actually directly buying these shares, the FII is. But it is doing so at the behest of the investor.
Therefore, Goldman Sachs, when participating in the FPO, was likely facilitating a trade from a client’s end, but not necessarily buying it for its own arm. In such cases, Goldman Sachs functions as a market maker in these transaction, acting separately from the research arm.
Goldman Sachs declined to comment.
On a similar tangent, let's look at the case of Swiss banking giant UBS. The two UBS funds participated in the FPO, purchasing 4.45 crore shares at Rs 11 each on April 16.
Fast-forward a few months, and UBS released a note on Indian telecom giants on August 28. As telecom majors undertake a tariff hiking cycle, UBS expects around 90-100 percent of the total tariff hikes to flow through to revenues over two quarters. The brokerage reiterated its buy call on Vodafone Idea, bumping its target price up from Rs 18 to Rs 19 per share.
Two days later, on August 30, a UBS fund 'UBS Principal Capital Asia' sold 38.2 crore shares or a 0.54 percent equity stake in Vodafone Idea for an average price of Rs 15.67 each.
When asked to clarify, UBS declined to comment.
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