Vodafone Idea in focus as FPO ends today: Should you buy into the Rs 18,000-cr issue?

Vodafone Idea is looking to raise Rs 18,000 crore through FPO, the biggest ever follow-on public offer by the Indian entity

Shares of beleaguered telecom service provider Vodafone Idea fell over 4 percent on April 22 ahead of its follow-on offer (FPO) closing later in the day. After two days of bidding for the Rs 18,000-crore issue, the subscription status shows that the FPO has garnered a decent response from investors with 49 percent of the book being subscribed

The company has already allotted 4.9 billion shares to anchor investors, which includes high profile investment managers like GQG Partners Fidelity, Stichting, and Motilal Oswal Mutual Fund, among others.

The retail portion of the FPO saw 13 percent buying, the NII portion was subscribed 75 percent, while the QIB segment of the FPO was booked 0.93 times.

The Vodafone Idea FPO price band was fixed at Rs 10-11 per equity share. In the grey market, the issue is available at a premium of Rs 1.40 per share. In the last session on April 19, the telco's shares closed at Rs 12.85 apiece, up Rs 1.85 from the upper price band. According to market observers, the GMP remained positive despite weakness in the secondary market.

Also Read | Vodafone Idea FPO booked 49% on Day 2, QIBs in lead

The FPO has received mixed views from brokerages.

Geojit Securities has recommended that investors with a high-risk appetite can subscribe to the issue.

“Considering the near-term risks of continued losses, subscriber attrition due to lack of expansion of 4G services compared to its peers, VIL is a high-risk proposition in the short to medium-term,” said the Geojit note.

“The long-term outlook will depend on the restructuring of the debt and expansion in 4G & 5G offerings. Given the strong parentage support, we assign the subscribe rating for high risky investors on a long-term basis,” the note said.

Broking firm IIFL Securities recently upgraded its price target for the stock to Rs 14.

IIFL Securities has upgraded Vodafone Idea to a price target of Rs 14, and has recommended subscribing to the issue. The broker expects tariffs to go up over the next three years which would benefit all players in the sector.

IIFL expects the equity infusion to be followed by debt-raising, which may result in Rs 45,000 crore in total funding.

"This would not only arrest subscriber losses but also enable faster upgrade of 2G users to 4G. Direct tariff hikes, coupled with this upgrade, should drive Vi’s ARPU from Rs145 in 3QFY24 to Rs 241 in FY27," the IIFL note said.

According to Kotak analysts, despite the fundraising, a potential hike in tariffs, there is no credible case where Vodafone’s cash EBITDA which stands at Rs 8,300 crore could increase substantially to meet the large annual due to the government. The conversion of government dues into equity will ease the financial burden but may not work well for investors anyway.

This will lead to a huge equity dilution that will be negative for existing investors, according to Kotak and other fund managers Moneycontrol spoke to.

“While there could be an extension of the moratorium, a partial waiver (relief on AGR dues) and further relief from the GoI, we believe writing off GoI dues entirety for a specific company will be difficult. We expect Vi to convert a large part of the GoI dues into equity over time, which could potentially lead to large equity dilutions for Vi’s non-GoI investors,” Kotak said in its report.

Also Read | Analysts versus GQG Partners: Whose footsteps should you follow in the Vodafone Idea FPO?

“The (Vodafone) shares could see a one-time pop, but beyond that having to deal with a significant government stake in what is supposed to be a private company can’t be a good thing,” a fund manager who did not wish to be quoted said.

“The issue is a hard 'sell' even though it comes at a considerable discount to the price (Rs 14.85) at which promoters have picked up stake deploying Rs 2,075 crore,” he said.

With so much uncertainty, making money on the stock will require impeccable timing, which may not be easy for retail investors. Prashanth Tapse of Mehta Equities suggests not taking part in the FPO, citing continuous loss of money and subscribers.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.