Vodafone Idea share price: Maintain Sell with a Target price of Rs 5

Vodafone Idea reported in-line results, with EBITDA rising 2.6% qoq after adjusting for the one offs/change in accounting policy. Shrinkage in the subscriber base of 2mn was lower than expectations and compared to an average of 10 mn loss in the last four quarters. In terms of operating parameters, healthy 4G additions came in as the lone positive. Postpaid subscriber base continued to contract with 2.2 mn loss in 9M FY21.

While Vodafone Idea’s ARPU of Rs 121 was below estimates, it was restricted by lower subscriber losses. The absence of fund-raise despite Vodafone Idea announcing it in Sep’20 and expectation of transaction closure within 3-4 months, is disconcerting, especially considering liquidity challenges. This has restricted 9M FY21 capex spends to just Rs 26.1 bn. Emkay continues to highlight that multiple rounds of tariff hikes, along with potential fund-raise and in turn ramp-up in capex spends, are essential to lift the company from the current gloomy scenario. Emkay maintains Sell with a Target price of Rs 5.

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Deceleration in the pace of subscriber losses, lower churn and healthy 4G additions were definite positives in the quarter. That said, although sustaining them is crucial, it seems to be a daunting task given constrained capex spends. With peers such as Bharti and Jio already making headway toward 5G, the absence of meaningful capex can potentially be detrimental.

Further, continued delays in fund-raising announcements in Vodafone Idea are surprising, considering the precarious condition of the balance sheet. Bearing in mind the upcoming 4G/5G spectrum auctions, disputed timelines for AGR payment and deferred spectrum obligation starting from FY23E, we believe a single round of fund-raising will be like a “band aid on a bullet hole” and will not be able to meet the impending cash burn of Rs244bn in FY21- 23E - despite assumed tariff hike in FY22E. Even then, any positive outcome of the petition for the recalculation of AGR dues could be a game-changer and should reduce overhang.

Vodafone Idea Key upside risks:

1) successful fund-raising resulting in capex ramp-up
2) restricted subscriber losses
3) downward revision in AGR dues
4) faster than expected and sustained revenue recovery