Can Vodafone Idea save itself from more losses?

In the month of December 2018, Vodafone Idea lost about 2,331,627 subscribers, compared to lost of 6,526,579 subscribers in November 2018 and 7,361,165 subscribers in October 2018. In terms of market share, the company now holds 35.61% in latest month, as against 36.55% in October month. Meanwhile, Vodafone Idea’s share price has corrected massively since start of 2019. The company’s shares dropped by nearly 24% so far. Interestingly, rating agency CLSA while retaining its ‘Sell’ target on the company, has also explained few measures which Vodafone Idea can look into to save themselves. 

In order to deleverage it’s balance sheet, Vodafone Idea have planned to raise about Rs 250 billion through rights of issue, under which Vodafone and Aditya Birla Group will contribute Rs 110 billion  and Rs 72.5 billion respectively.

Despite this large equity raising/dilution (97% of market cap), CLSA estimate’s that Vodafone Idea’s gearing will still be out of control at 7x-13x over FY20-22.

Further CLSA said, “Assuming management’s guided capex of Rs270bn over FY19-20, no non-spectrum debt repayments and our forecast of a fourfold jump in Ebitda over FY19-21, the infusion in our estimate will still fund losses only till FY21, post which we estimate the company will again need to raise funds.”

For now a sell call! 

CLSA says, “While there is limited clarity on whether telcos can selectively close down operations and surrender spectrum as this has implications on government’s receipts from the sector, if allowed, this could help Vodafone Idea to bring leverage under control.”

“With Vodafone Idea’s pan-India operations and gearing out of control even after factoring in rights issue of Rs 250 billion, we retain SELL on Vodafone Idea with a target of Rs 27/share,” CLSA adds.

Meanwhile given high operating and financial leverage, stock’s valuations are highly sensitive to revenue assumptions. A 10% higher revenue estimate results in a 2.5x jump in fair value.

A new plan, by CLSA 

Vodafone Idea’s current situation warrants a strategic shift from being a pan-India operator in 22 circles to being a regional operator focused on 10 key markets. The remaining 12 markets form 28% of its revenues and are loss making at Ebitda level. 

By shutting operations in these markets, Vodafone Idea will not only boost its Ebitda by Rs 16 billion in FY20, but will also lower its spectrum debt by current Rs 300 billion (assuming no cash return by government on surrender of spectrum), which in turn could lower annual spectrum payments (interest and principal) by Rs 41 billion. 

This could lower Vodafone Idea’s free cash flow deficit to mere Rs 65-70 billion vs Rs 100-105 billion earlier and also lower its net gearing to 5x Ebitda by FY21.