VODAFONE IDEA

Considering the government’s support to resolve the financial crisis and the backing from the Aditya Birla Group, along with targeted investments aimed at improving operational efficiency and enhancing service offerings, a cautious recommendation is warranted for long-term investors[EasyDNNnews:PaidContentStart]

Vodafone Idea Limited, commonly known as Vi, is a prominent telecommunications provider in India, formed through the merger of Vodafone India and Idea Cellular on August 31, 2018. Headquartered in Mumbai and Gandhinagar, Vi is now the third-largest mobile network operator in India, boasting a subscriber base of approximately 217.3 million as of April 2024, and ranking as the 12th largest globally in terms of subscribers.

The company operates across a wide spectrum of services, including 2G, 3G, 4G, and recently has initiated 5G offerings. Vi provides a comprehensive range of mobile services such as voice, data, and value-added services (VAS), which encompass digital content and IoT solutions tailored for both individual consumers and enterprises. With a significant market share of around 18.7 per cent in the Indian telecommunications sector as of December 2022, Vi plays a crucial role in the country’s digital landscape.

Vi’s operational strategy is supported by a robust spectrum portfolio that allows for extensive coverage across various regions in India. The company is backed by two major stakeholders: Vodafone Group Plc holds a 45.2 per cent stake,while the Aditya Birla Group owns 26 per cent. This partnership not only enhances Vi’s market presence but also facilitates access to advanced technologies and infrastructure.

Despite facing challenges such as subscriber losses in recent years and financial restructuring—including the conversion of interest dues into equity—Vodafone Idea remains committed to improving its service quality and expanding its network capabilities. The company aims to enhance customer experiences through innovative digital solutions and infrastructure development, contributing to India’s vision of a connected and digital future.

Financials
Vi has faced a challenging landscape in the telecommunications sector, characterised by significant financial losses and a declining subscriber base during fiscal year 2024 (FY24). However, the company demonstrated signs of improvement in the first quarter of fiscal year 2025 (Q1FY25). In FY24, Vodafone Idea reported total revenue of approximately ₹42,000 crore, reflecting a slight decline compared to the previous fiscal year. The company experienced a substantial net loss of around ₹30,000 crore for the year, an increase from ₹29,000 crore in FY23.

Despite these challenges, there was a notable improvement in the average revenue per user (ARPU). In the latest Q1FY25, its ARPU had risen to ₹146 from ₹139 in Q1FY24, marking a 4.5 per cent increase year-over-year. However, this figure still lagged behind competitors such as Bharti Airtel and Reliance Jio. Vodafone Idea’s total subscriber base decreased by approximately 5 per cent year-over-year to around 201 million at the end of Q1FY25. This decline was largely attributed to increased competition and subscriber migration to rival networks. Nevertheless, Vi experienced growth in its 4G subscriber base, which reached approximately 126.7 million by June 2024—a 3 per cent increase as users transitioned from 2G services.

Q1FY25
In Q1FY25, Vodafone Idea reported improvements in its bottom-line performance compared to the previous year. The total revenue for Q1FY25 was ₹10,508 crore, representing a 1.4 per cent decline from ₹10,655 crore in Q1FY24. The service revenue also declined approximately 1 per cent year-over-year However, the consolidated loss after tax for Q1FY25 was ₹6,432 crore—a reduction of nearly 18 per cent compared to a loss of ₹7,840 crore in Q1FY24.

The ARPU continued its upward trend, rising to ₹146 in Q1FY25 from ₹139 in the same quarter last year. While the total number of subscribers fell by about 5 per cent year-overyear to approximately 201 million in Q1FY25, there was positive growth in the number of 4G subscribers. The count increased by about 3 per cent YoY to reach around 126.7 million. The total expenses for Q1FY25 decreased by approximately 7 per cent to ₹17,191 crore compared to ₹18,513 crore in Q1FY24.

Funds and Financial Obligations
In FY24, Vi raised ₹240 billion through various means, including a follow-on public offering (FPO) of ₹180 billion, preferential allotments to promoters and vendors, and conversion of optionally convertible debentures (OCDs) into equity. The company plans to use these funds for network expansion and 5G deployment. As of June 30, 2024, Vodafone Idea’s financial obligations included:
• Outstanding debt of ₹90,789 crore from banks and other entities
• Deferred payment obligations of ₹216,161 crore related to spectrum and adjusted gross revenue (AGR).

Throughout fiscal year 2024 (FY24), Vi reduced its outstanding debt by about ₹4,550 crore. Despite this reduction, Vodafone Idea continues to face significant financial pressure due to its substantial liabilities, which total ₹306,950 crore, including both outstanding debt and deferred payment obligations.

Once the government’s ongoing moratorium ends in September 2025, Vodafone Idea will need to pay ₹29,000 crore in March 2026 and ₹43,000 crore in March 2027. The company’s ability to generate sufficient cash flows to meet these obligations is uncertain. The company is actively engaged in negotiations with lenders and the government to secure more favourable terms, waivers, and restructuring options to improve its financial stability in the competitive telecom market.

Equity Dilution Concerns
Vodafone Idea shareholders are significantly impacted by equity dilution due to several factors. The company conducted a ₹25,000 crore rights issue in 2019, which diluted the existing stakes as it sought to raise funds amid financial difficulties. In 2022, the situation worsened when ₹16,000 crore in government dues were converted to equity, resulting in the government acquiring a 33 per cent stake in the company. Additionally, Vodafone Idea has been issuing equity to settle vendor dues, further eroding shareholder value. With mounting debt and increasing competition, the risk of future equity dilution continues to be a pressing concern for shareholders.

Capital Expenditures
To address its operational challenges, Vodafone Idea (Vi) has announced a capital expenditure (capex) plan of ₹50,000 to ₹55,000 crore over the next three years. This investment aims to enhance its 4G network and prepare for the rollout of 5G services, which is expected to reduce subscriber loss and increase the ARPU by upgrading its 2G customers. This infrastructure build-up would result in reduced subscriber loss and an increase in ARPU by an increase in the upgradation of their 2G clients.

As Vi focuses on upgrading its 2G subscribers to higher-tier 4G and 5G services, it anticipates lower churn rates and higher revenue per user. As part of this initiative, Vodafone Idea has finalised a ₹30,000 crore agreement with Nokia, Ericsson and Samsung for network equipment procurement over the next three years.

Triggers
1. Government Support: The Indian government has actively supported Vodafone Idea by converting approximately ₹16,000 crore of interest liabilities into equity, becoming a major shareholder. This support is crucial for stabilising the company and enabling it to invest in network expansion, which aligns with the government’s broader digital infrastructure goals.

2. Potential Tariff Hikes: An increase in the average revenue per user is anticipated due to potential tariff hikes, which could positively impact revenue.

3. Expanding 4G Coverage: Vodafone Idea plans to expand its 4G population coverage from 1.03 billion to 1.2 billion people. This expansion is crucial for capturing a larger market share and enhancing service availability.

4. Upgrading 2G Clients: The company expects an increase in ARPU through the upgrade of its 2G customers to 4G services. This transition will not only boost its revenue but also improve customer experience and retention.

5. Cost Optimisation Initiatives: Continued efforts in cost reduction and operational efficiency can improve profitability, allowing the company to invest more in growth initiatives.

Valuation
• Return on Capital Employed (ROCE): -3.61 per cent
• Return on Assets (ROA): -4.76 per cent
• Return on Equity (ROE): -39.4 per cent n Price-to-Earnings (P/E) Ratio: Not applicable due to negative earnings
• Price-to-Book (PB) Ratio: -0.62
• Enterprise Value to EBITDA (EV/EBITDA): 15.85.

These ratios indicate that Vodafone Idea is struggling to achieve profitability and maintain a healthy financial position compared to its peers, such as Bharti Airtel, which has a PE of 34.14 and an EV|EBITDA of 25.01 times.

Conclusion
With government support and backing from the Aditya Birla Group, Vodafone Idea offers a cautious long-term investment opportunity. Despite significant financial liabilities and competitive challenges, the company's efforts to stabilize its financial health and strengthen its market position present a favorable "Buy" recommendation for investors willing to embrace risks.

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