Vodafone Idea share price: Subscriber loss bottoming out, but liquidity a major concern highlights Motilal Oswal

Vodafone Idea’s Adjusted EBITDA (excluding a one-off expense of Rs 3 bn on a pre Ind AS 116 basis) was up 15% QoQ (9% beat) due to strong cost rationalization, reducing SG&A by 32% QoQ as subscriber churn significantly decelerated. Vodafone Idea’s liquidity, ability to invest on its network as well as protect its market share is constrained by the humongous net debt of Rs 1171 bn and meager FY22E EBITDA of Rs 107 bn (pre Ind AS 116), thus dependent on a further fund raise. Motilal Oswal changed rating from Under Review to Neutral.

Vodafone Ideas revenue grew by 1% QoQ to Rs 109 bn (in line), led by a 1.7% rise in ARPU to Rs 121, but was partially offset by a 0.7% decline in its subscriber base. Vodafone Idea’s EBITDA grew 3.2% QoQ to Rs 42.8 bn (9% beat) as SG&A fell 32%. Adjusted EBITDA (on pre Ind AS 116) stood at Rs 18.8 bn, up 15% QoQ (9% beat), excluding the Rs 3 bn one-off in both 2Q and Q3 FY21. Net loss stood at Rs 45.3 bn v/s Rs 72 bn in Q2 FY21. Adjusted net loss (for exceptional) came in at INR62.3 bn on post Ind AS 116 basis v/s Rs 64.5 bn in Q2 FY21 (v/s our estimate of Rs 58.1 bn).

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Vodafone Idea’s has recognized a gain of Rs 17 bn as an exceptional item. Subscriber losses continued. However, the pace reduced to a mere 2 mn v/s 8.1 mn in Q2 FY21 (-0.7% QoQ) to 269.8m (in line). Active subscribers too continued to decline, but at a slower pace, at 4.6 mn v/s 11.8 mn in Q2 FY21 to 256.6 mn. Data subscribers remain flat at 137.6 mn (2 mn increase in Q2 FY21). Broadband subscribers increased by a mere 1m in Q3 FY21 to 120.8 m, lower than the 3.4 mn increase in Q2.

4G subscribers increased by 3.6m v/s 1.5m in 2QFY21 to 109.7m, mainly from shift of 3G subscribers as overall data/broadband subscribers are flat. Bharti Airtel added 12.9 mn while Reliance Jio added 5.2 mn. ARPU came in at Rs 121, up 1.7% QoQ (in line). The same grew 4% QoQ in Q2 FY21. Bharti’s ARPU grew 2.5% QoQ on strong 4G additions. Capex intensity remained low, Rs 9.7 bn in Q3 FY21 v/s Rs 10.4 bn in Q2. Cumulative capex in 9M FY21 is just Rs 26 bn v/s Rs 110 bn for Bharti Airtel. Net debt stood at Rs 1171 bn v/s Rs 1145 bn in Q2 FY21 (including Rs 942 bn deferred spectrum liability). Gross debt stood at Rs 1173.7 bn, excluding lease liabilities. Cash stood at a mere Rs 2.9 bn.

Highlights from the management commentary:

Strategic focus:

The management is focusing on five strategic areas:

a) improvement in ARPU
b) digitization of customers
c) new fast growing business areas (Enterprise, Cloud service, and IoT)
d) driving partnership and digital revenue streams
e) cost optimization

Vodafone Idea’s management is focusing on making investments in 16 priority circles, contributing 92% of revenue, and re-farming 3G spectrum to 4G by ending 3G services by FY22. Debt maturity of the Rs 128 debt maturing, only Rs 30 bn is due for payment in the next 12 month.