Evaluation of Vodafone “Neutral” ideas; net debt at Rs 1.9 lakh crore

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The significant amount of cash required to service its debt leaves limited upside opportunities for shareholders, despite the opportunity for high operating leverage from any source of ARPU increase.

The decline in income continues; needs immediate support in terms of liquidity: adjusted EBITDA (excluding exceptional items on pre Ind AS 116) amounted to Rs 12.8 billion against Rs 17.1 billion QoQ. This has been attributed to the high rate of subscriber churn due to the Covid-led lockdown and the fall in ARPUs. With an EBITDA (pre-Ind AS 116) of Rs 38.5 billion in 2HFY22E, it will be difficult to invest in the growth of its network and its service, future repayments of: a) Rs 64.7 billion NCD during FY22, b) Rs 82 billion deferred spectrum payment, and c) AGR. A capital increase or government relief program remains essential to provide immediate liquidity support to service the rising net debt of Rs 1,907 billion (including AGR liabilities). We maintain our “neutral” rating.

Highlights of management commentary: VIL focuses on investments in 16 priority circles, which contribute 94% of turnover. High ARPU Subscriber Focus: It aims to expand higher ARPU subscriber programs in partnership with OEMs and NBFCs for 4G devices.

Tax Refund: He received Rs 10 billion as a tax refund during 1QFY22. The balance to be received now stands at Rs 58 billion. Rate change: The company has increased the rates for entry-level corporate postpaid / prepaid plans to Rs 299 / Rs 79 from Rs 199 / Rs 49. It is generating positive cash from its operations to meet its repayments and its investment needs. It engages with investors for new financing and conducts parallel discussions with bondholders for refinancing.

Assessment and View: Declining subscribers and subsequently revenues are disproportionately hurting EBITDA due to the high nature of the fixed costs of the business, with rising inflationary costs. This makes any rate increase too difficult to fill the cash flow gap. VIL’s low liquidity position may force it to rationalize its investments in the network, as evidenced by the reduction in the intensity of capital expenditure and the intensification of the churn rate. Management said it was in discussions with potential investors for the $ 250 billion fundraiser, but the timing remains uncertain.

A capital increase or government relief program remains essential to provide immediate liquidity support to service the rising net debt of Rs 1,907 billion (including AGR liabilities). With an EBITDA (pre-Ind AS 116) of Rs 38.5 billion in 2HFY22E, it will be difficult to invest in the growth of its network and its service, future repayments of: a) Rs 64.7 billion NCD during FY22, b) Rs 82 billion deferred spectrum payment, and c) AGR. The only bright spot, as management has indicated, is the resumption of its subscriber base after the lockdown was lifted in June ’21.

The significant amount of cash required to service its debt leaves limited upside opportunities for shareholders, despite the opportunity for high operating leverage from any source of ARPU increase. The current low EBITDA would make it difficult to service the debt without an injection of external funds. Assuming 9x EV / EBITDA, with a net debt of 1,907 billion rupees (excluding rental liabilities and AGR debt), this leaves limited opportunities for shareholders. We maintain our “neutral” rating.

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