Nothing is going good for Vodafone Idea.
The telecom major is bleeding money faster than it ever suffered and at a time when the coffers are running dry. In the second quarter of fiscal 2023, the losses for the telecom major widened to nearly Rs 7600 crore. Along with that it has not been able to raise money and now there is a very good chance that it will lag its peers in 5G rollout, which is likely to be capex heavy.
No wonder analysts tracking the stock are unanimous in their verdict: don’t touch it; and if you own any, dump it as soon as possible.
Customers fleeing
The biggest and foremost worry for Vodafone Idea right now is that its peers are nibbling away its customers slowly but gradually. Less customers means less revenue for the company. The trend continued for another quarter.
The company said it lost 60 lakh subscribers during the quarter, almost double of 34 lakh it lost in the previous quarter. Its customer base now stands at 23.44 crore, which is nearly half of that of Reliance Jio, which added 77 lakh subscribers in the second quarter. Bharti Airtel also saw an addition of subscribers during the period.
Vodafone’s active subscribers too continued to decline at the same pace – by 65 lakh – to 21.22 crore. The number was slightly better than the June quarter when the loss was 74 lakh. The number of data subscribers remained flattish at 13.5 crore for the last four quarters.
To its credit, Vodafone Idea managed to grow the 4G subscriptions by 16 lakh sequentially to 12.06 lakh. However, given how much revenue generating customers it has lost, the addition leaves much to be desired.
Unlike its peers who are trying to reach as many PIN codes as they can in the country, Vodafone Idea has employed a different strategy. It focuses on its high revenue generating regions.
The company generates 98 percent of revenue from 14 circles and, it said, it will continue to invest in these regions. There are a total of 22 telecom circles in India. In line with its strategy, it is also closing its 3G sites and adding 4G sites. The joint venture between Vodafone Plc and Aditya Birla Group has closed 19,000 3G sites and added 8,500 4G sites, it said.
This step comes at a time when users have consistently complained of the company's lacking network coverage. The management during the analyst call also accepted that it was losing subscribers due to network woes.
The jury is still out whether this strategy to focus on selective regions will work.
The lack of funds at Vodafone Idea’s coffers is not a secret. The company has been trying to raise funds from multiple avenues for a while now. However, it has failed to raise any substantial amount for a multitude of reasons.
One key reason is the delays in conversion of part of statutory debt to equity in lieu of the government. The company management said it is in discussion with the government to convert the equity, however, it has not heard any communication from the Department of Telecom (DoT) since April 2022.
Despite silence from the government, market regulator Securities and Exchange Board of India (Sebi) last month approved a proposal to convert dues of over $1.92 billion by Vodafone Idea to equity. This will likely make the government the largest shareholder in the company with over 30 percent stake in it.
The company said it has approved the issuance of Rs 1,600 crore worth of optionally convertible, unsecured, unrated, and unlisted debenture to ATC Telecom Infrastructure Pvt Ltd. It the largest provider of infrastructure to the company. Vodafone is willing to take similar steps to other vendors as well to lighten pending dues on its books. Meanwhile, Indus Towers, in which the company used to hold a large stake, has repeatedly highlighted the dues Vodafone Idea owes to it.
The unusual ways of clearing dues to its vendors shows how precarious is the condition at the company, as far as cash is concerned. Analysts believe the company needed the fresh funds as of yesterday.
“It continues to lose subscribers (mainly in 2G segment) and that adversely impacts revenue growth. The addition of 4G subscribers remains muted,” said Piyush Pandey, Lead Analyst at Yes Securities. He added that the company “urgently needs massive capital infusion” for augmenting the capital expenditure to match up with peers in terms of 4G coverage.
The company also needs cash to rollout 5G services, in which Airtel and Jio have taken a lead. This is in addition to money Vodafone Idea spent on 5G spectrum acquisition that increased its net debt to Rs 2.2 lakh crore.
ARPU grows
One good news is that the company has reported a fifth consecutive quarter for growth in average revenue per user (ARPU) per user and overall revenue. However, the ARPU was much lower than its peers with no signs of catching up.
Vodafone Idea said its ARPU came in at Rs 131, up 2 percent sequentially, led by tariff hikes and migration of subscribers to unlimited plans. Airtel and Reliance Jio reported an ARPU increase of 4 percent and 1 percent, respectively, for the September quarter.
Similar to its peers, Vodafoen also saw an increase in data traffic by 5 percent on-quarter (QoQ). Data usage per subscriber increased 6 percent QoQ to 14 GB against around 21 GB for Airtel and Reliance Jio.
Most analysts covering the stock have a ‘sell’ or ‘reduce’ ratings as they don’t see the company to come out of the abyss anytime soon. Their target price on the stock sees downside in the low single digit from current levels.
“We retain our ‘reduce’ stance on Vodafone Idea given the present uncertainty on the path of value creation and further potential large dilution expected from likely equity conversion,” said Hemang Khanna, an analyst at Nomura Financial Advisory and Securities.
He, setting target price of Rs 8 per share, added that the company may find it difficult to reverse the loss of subscribers as it will remain behind Bharti Airtel and Jio on pan-India network capabilities and service offerings.
Pandey expects an estimated revenue CAGR of 14.3 percent over FY22‐24 with average EBITDA margin of 43 percent but maintained ‘reduce’ rating on the stock with unchanged target price of Rs 8 per share as well. He values the stock at EV/EBITDA of 9.5x on FY24 estimated earnings.
Aliasgar Shakir, Research Analyst at Motilal Oswal, has a ‘neutral’ rating with target price at Rs 8. He added that continued subscriber loss along with a slow 5G rollout is expected to dilute earnings.
He said Q2 annualised EBITDA of Rs 16,400 crore may not be sufficient to meet debt repayments, which includes intensive capex needs and the ability to compete fiercely to retain market share.
On November 9, the stock traded at Rs 8.37 on BSE.
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