Vodafone Idea Rating – Decrease: A stable operating performance

Vodafone Idea (VI) provided in-line results with a 5.4% qoq revenue increase in Q4FY22, a 7.5% increase in ARPU and a 3.4mn loss in subscriber numbers (vs. 5.8mn fall in Q3FY22). Although VI’s operating performance is stable, the fundamental problem of high financial leverage can only be solved by significant tariff increases and equity infusions. Capital access is crucial considering the upcoming 5G spectrum auction, but the company’s ability to invest in the network is limited by high debt and low cash Ebitda. The advertisers have accumulated Rs 45 billion, but that is not enough. We are waiting for the next capital increase. In the absence of any visible increase in large tariffs and in the absence of challenges in raising capital, we keep ‘lowering’ with a TP of 7.

Operating Performance Stable: VI’s revenue grew 5.4% qoq to Rs 102.4 billion. APRU has increased from Rs 115 to Rs 124. The company added 1.1 million 4G subscribers in the quarter. Overall margin increased by 610bp to 45.4%. One-off was Rs 1.5 billion in network and IT costs, resulting in an EBITDA adjustment of Rs 45 billion. The cash on the book now stands at Rs 14.6 billion, down from Rs 15 billion in the three quarters to Rs 1.96 trillion net debt.

Awaiting Capital Rise and Tariff Rise: We believe that VI has a very small window to raise capital and prepare itself for 5G considering the spectrum auction scheduled for H2FY23. Considering that VI lags behind its peers in terms of network investment, timely capital increase and network investment will be crucial for the long term sustainability of the business. Also, ARPU’s current debt obligations need to be doubled for VI over the next 3-4 years.

Outlook: Leverage remains high – the company needs to ensure that it successfully upgrades its 2G subscriber base to 4G and retains the overall subscriber base so that ARPU growth translates into increased revenue. The stock is trading at 11x FY23e EV / Ebitda. Maintain ‘REDUCE / SU’.