Debt-ridden telecom major Vodafone Idea is set to launch India's largest follow-on public offer (FPO) on April 18 in order to alleviate its considerable financial distress by repaying outstanding dues and other liabilities. The Rs 18,000-crore FPO is part of a broader plan to raise Rs 45,000 crore through debt and equity.
While the fundraising will help Vodafone Idea enhance its 4G and 5G networks and improve market competitiveness, analysts are cautious – mostly suggesting an ‘avoid’ on the issue. They cite persistent losses, uncertainty in repaying government dues, intense competition from rivals like Reliance Jio and Bharti Airtel, and risks associated with equity dilution.
At odds with this overwhelming stance taken by analysts is the huge leap of faith shown by GQG partners which has come in as an anchor investor putting in Rs 1,348 crore. This is not to be shrugged off, especially after the contrarian investor’s bet on Adani paid off big time. Besides, the anchor book of Rs 5,700 crore is largely funded by various arms of foreign investors like Fidelity, Goldman Sachs, Morgan Stanley, Citigroup, UBS, Abu Dhabi Investment Authority and Society Generale.
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On the other hand, five domestic mutual funds placed small bets picking up 79.5 crore shares (which amount to Rs 874 crore) across 11 schemes – not particularly an encouraging sign.
A low-priced share is always a big draw for retail investors because of the perception that they could gain much faster than high price shares – Rs 10 can become 20 while, it’s hard to envisage a Rs 10,000 share growing to become Rs 20,000 in value. While that is a myth because share prices are finally driven by a company’s ability to grow profits and not a function of the absolute price itself, is there a strong case for investing in the Vodafone IPO?
Cash shortfall may persist, equity dilution risk to repay government dues
“We remain on the sidelines on VIL for now given uncertainties on future repayments as well as equity dilution,” said Citi Research in a note. It said the FPO and potential tariff hikes could boost cash flow temporarily, but significant challenges remain, particularly post-FY26 when payment moratoriums expire, resulting in additional government dues of Rs 29,000 crore and Rs 43,000 crore.
CLSA too echoed the same concern and maintained a 'sell' rating on the Vodafone Idea stock with a target of Rs 5 per share, forecasting annual spectrum and AGR payments of about $4 billion per annum (about Rs 33,000 crore per year) falling due post FY26.
The Vodafone Idea stock has fallen 24 percent since January this year to Rs 12.9 as of the last close.
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No relief from competition likely, even after mega fundraising
Analysts’ pessimism on Vodafone Idea stems from the company's ongoing losses of Rs 23,564 crore over the last nine months of 2023, and its dwindling subscriber base, with 17 million users lost over the past year. Vodafone has a 21 percent share of subscribers and 17 percent share of revenue among Indian telcos.
On the other hand, competition has been growing stronger. In February 2024, when Vodafone lost one million subscribers, Reliance Jio gained 3.6 million users, and Bharti Airtel gained 1.5 million customers.
Despite the FPO, analysts doubt whether the fundraising will significantly alter Vodafone Idea's market position. It will still remain a tall ask for Vodafone Idea to gain back market share from larger peers, said Kotak Institutional Equities.
That’s largely because of the severe financial constraints that prevent Vodafone from making the required capex to offer customer experience on par with competition to even maintain their loyalty. Vodafone Idea’s subscriber loss is due to low capex of Rs 1,300 crore over 9M FY24, which is 93 percent lower than Bharti Airtel’s India mobile capex of Rs 19,300 crore, said CLSA.
Vodafone Idea plans to allocate Rs 12,750 crore towards acquiring equipment to expand its network infrastructure, including setting up new 4G sites, boosting the capacity of existing 4G sites, and establishing new 5G sites. It will use Rs 2,175 crore for deferred payments related to spectrum and towards goods and services tax.
But that capex may not be sufficient to getting it up to speed with competition. “We expect Vi to bridge the network coverage gap on 4G and arrest some of the market share losses. However, the gap in 5G coverage (versus larger peers) would still remain significant,” said the Kotak note. Rather than improving, this persistent gap is only likely to make it more vulnerable to market-share losses, other analysts point. “…a continued delay to its 5G rollout could trigger further subs share consolidation, as Reliance Jio and Bharti Airtel continue to rapidly ramp up 5G,” said CLSA. Not only has CLSA pegged its target price at Rs 5, the brokerage has said that the falling subscriber numbers add further downside risks to its forecast.
Should you invest in Vodafone Idea FPO: Loss, rich valuation, competition concerns loom
Those predictions of stress in cash flows assume that the company will have to pay up the AGR dues when it becomes due in FY26. Kotak analysts say that despite the fundraise, a potential hike in tariffs, there is no credible case where Vodafone’s cash Ebitda which stands at Rs 8,300 crore currently 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 in 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.
In the worst case if the government converts 100 percent of its dues Rs10 per share, the government could end up with an 81 percent stake, with the existing promoters’ stake diluted to roughly 9 percent versus 49 percent currently and 38 percent post fund-raise. Non-promoters’ stake could be diluted to roughly 9 percent from 16 percent currently and 36 percent after fund-raise.
“The shares could see a one-time pop, but beyond that having to deal such a significant government stake in what is a 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 the issue 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. Amit Goel, co-founder and chief global strategist at Pace360, advises not to apply for the public issue, saying that the valuations are ‘very rich’. Swastika Investmart's head of wealth Shivani Nyati noted that Vodafone Idea's path to revival seems uncertain.
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.
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