Vodafone Idea results disappoint, brokerages downgrade their target price

JM Financial maintains a SELL rating with target price of Rs 7, given the uncertainties with regards to the timing of tariff hikes. ICICI Securities maintains sell rating with target price of Rs 5. ICICI Securities believes say it was no show from VIL in Q2 FY21 with subscriptions decline of 8 mn, 4G net add at a meagre 1.5 mn, and drop in minutes and data usage.

Vodafone Idea Q2FY21 Review (Consolidated; QoQ) – Weak, Results show no early sign or give comfort on Vodafone dea turning going concern

Financial highlights:

Revenue up 1.2% to Rs 10791 crore vs Rs 10659 crore
EBITDA up 1.3% to Rs 4152 crore vs Rs 4098 crore
EBITDA Margins at 38.5% vs 38.4%
Net loss at Rs 7219 crore vs Rs 25460 crore
ARPU up 4.4% to Rs 119 vs Rs 114

Cash position weakened to Rs 1430 crore vs Rs 3450 crore as the company might have paid some debt
Gross debt lower to Rs 115940 crore vs Rs 118940 crore
Lower cash and liquidity impacted capex spend
EBITDA growth aided by additional cost saving initiatives which resulted into savings of Rs 250 crore (Plans to achieve additional Rs 4000 crore of annualised cost savings over next 15 months)

Vodafone Idea (VIL) reported consolidated revenues of Rs 107.9 bn vs street estimates / JM Financial estimate of Rs 106.7 bn / 109.3 bn . ARPU growth for the quarter was modest at 4.4% QoQ, with reported ARPUs for Q2 FY21 coming in at Rs 119, still lower than the Q4 FY20 ARPU of Rs 121. Further, VIL lost another 8 mn subscribers in Q2 FY21; this unabated subscriber losses continues to be a major negative for VIL as it raises the breakeven ARPU required for meeting payment obligations. However, the silver lining in the results was the increase in mobile broadband (MBB) subscriber base by 3.4 mn QoQ to 119.8 mn at the end of Q2 FY21. Survivability of VIL could be ensured only by significant and sustainable tariff hike.

Q2 FY21 results marked by subscriber losses, modest rebound in ARPU

The unabated subscriber losses continues to be a major negative for VIL as the breakeven ARPU required for meeting payment obligations go up, it could hamper cost reduction initiatives due to the negative operating leverage (given the high fixed costs). In the long term, VIL loses out on the opportunity to upgrade these users to MBB and improve profitability. Further, ARPU growth was modest at 4.4% QoQ, reaching Rs 119 in Q2 FY21 (still lower than the Q4 FY20 ARPU of Rs 121). MBB subscriber additions across players in Q2 FY21 is due to increased demand for data driven by Ed-tech, Work from Home and OTT consumption as highlighted in our initiation thematic. VIL requires an ARPU of Rs 190-200 by FY23E to meet its payment obligations. While the MBB subscriber growth of 3.4 mn QoQ is encouraging, the 8.7% QoQ drop in AMDU (Average Monthly Data Usage per subscriber) to 11.7GB/month was higher than expected. JM Financial believes VIL would have to augment its value added services similar to Bharti and Jio, to drive higher usage and thereby ARPU growth.

Tariff hikes inevitable to avoid Duopoly market:

JM Financial have reduced their FY22E / 23E EBITDA estimates by 1.2% / 3.5% as they moderate their ARPU assumptions and assume higher subscriber losses, partially offset by higher cost savings. The continued subscriber losses and the moderate growth in ARPU strengthen the case for a significant tariff hike, to avoid a Duopoly market. Due to the subdued ARPUs and EBITDA, JM Financial believes VIL’s ability to incur capex could be constrained (capex for first half of FY21 was only Rs 16.4 bn vs. Rs 49.8 bn in First half of FY20). The lower capex could result in poor network experience, further accelerating subscriber losses, leading to further consolidation of the industry.

Maintain SELL given uncertainty on timing of tariff hike:

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While JM Financial believes that the Rs 250 bn of fund raise could tide over near term liquidity issues, the medium and long term survivability of VIL could be ensured only by significant and sustainable tariff hike. JM Financial Maintains SELL, due to the uncertainties with regards to the timing of tariff hikes, with an unchanged TP of INR 7/share. Any faster than expected increase in tariffs would be a major upside risk to estimated numbers.

ICICI Securities say With the AGR case behind, VIL will need to bounce back stronger, with limited resources, to remain a going concern. Capex for VIL is contingent on fund raising and any delay may hurt it further. Company requires tariff hike sooner rather than later to boost operational cash flow, and we see it likely to initiate tariff hikes, which should be followed by competition. Capex for the quarter stood at Rs 10 bn (9.6% of total revenues) vs Rs 6 bn in Q1 FY21. Net debt stood at Rs 1145 bn, down Rs 10 bn, in Q2 FY21. Cash balance dipped to Rs 15 bn (vs  Rs 41 bn in Q1 FY21). This does not include unpaid AGR liabilities of Rs 578 bn.