Vodafone Idea’s Follow-on Public Offering (FPO) worth Rs 18,000 crore will improve its competitiveness with rival telecom operators to some extent and lead to a sharp reduction in bank debt, which will allow it to secure further funding from banks, analysts said.
"Vi’s FPO is a step in the right direction albeit much delayed and should help bridge the network coverage gap and improve competitiveness versus peers (to some extent). Further, with a sharp reduction in Vi’s bank debt, we believe Vi will be able to secure further funding from banks," analysts at Kotak Institutional Equities said in a note.
While the fund-raise should improve Vi’s near-term fortunes, analysts said they don’t expect Vodafone Idea to gain any meaningful market share from its peers.
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“We remain concerned about potential large equity dilution on the conversion of Government of India (GoI) dues. Potentially, the GoI could own an 80%+ stake in Vi on a fully diluted basis in the worst case, which would limit any meaningful upside for Vi’s minority investors,” Kotak said in a note.
Vodafone Idea plans to spend the Rs 18,000-crore capital raised from its FPO to set up new 5G sites, expand its 4G network, and defer spectrum payments, the telco said in its red herring prospectus (RHP) filed.
Of the total FPO proceeds, the telco proposes to use Rs 12,750 crore to purchase equipment for expanding its network infrastructure by setting up new 4G sites, expanding the capacity of existing 4G sites, and setting up new 5G sites. It will spend Rs 5,720 crore of the Rs 12,750 crore earmarked for network expansion on setting up its 5G network with 22,000 new sites.
The Vodafone Idea FPO will open for subscription on April 18 and close on April 22. The company has fixed a price band of Rs 10-11 per share for the FPO.
“Further, with a sharp reduction in bank debt (~Rs45 billion at end-Feb 2024), we believe Vi will be able to secure further funding from banks,” Kotak said. “We believe that increased 4G coverage will help arrest market share losses on 4G in the near term.”
The telco also recently raised $250 million through a preferential share issue to a promoter entity led by the Aditya Birla Group.
“Our sensitivity analysis indicates that the promoter shareholding could fall to 38% vs. 50.3% now if VIL raises Rs 180 billion at the announced price band of Rs 10-11/ share,” BofA Securities said in a separate note.
Analysts at BofA Securities said the intended capex will help the telco’s coverage to potentially improve, which could likely lead to the telco losing none to a few users and, hence, incremental market share gain for competitors slowing.
“We believe that Bharti Airtel was a bigger beneficiary in the past of mid-to-high-end VIL users churning out. However, Bharti and Jio are likely to gain share, given their investments in 5G and better competitive positioning in the 5G market. We also see upside risks to Bharti/Jio capex (although marginally) if they respond to VIL’s improving positioning.
BofA analysts said that potential tariff hikes, likely in 3-6 months, are expected to further help improve cash-flows of Vodafone Idea.
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