Vodafone Idea

Looking at the company’s solvency and liquidity position, it has significant amount of liabilities which are greater than the assets, making the shareholders’ equity negative 

Vodafone Idea Limited, a collaborative endeavour between the esteemed Aditya Birla Group and the globally recognised Vodafone Group, commands a prominent position as India’s foremost telecommunications service provider. In March 2017, it was announced that Vodafone India and Idea Cellular would merge. The merger got approval from the Department of Telecommunications in July 2018. On August 30, 2018, the National Company Law Tribunal gave the final nod to the Vodafone-Idea merger, which was completed on August 31, 2018, and the new entity was named Vodafone Idea Limited. 

Catering to the diverse needs of consumers, the company offers comprehensive voice and data services spanning the entire spectrum from 2G, 3G and 4G platform, seamlessly connecting millions of users across the nation. The company is steadfast in its commitment to delivering unparalleled customer experiences while actively contributing to the realisation of a digitally empowered India. Through ongoing infrastructure development initiatives, the company is at the forefront of introducing innovative technologies, ensuring that both retail and enterprise clients are equipped for the future with forwardthinking solutions. 

These are accessible through an integrated ecosystem of digital channels and an extensive physical presence. It has been ranked as the third-largest telecommunications service provider in India by subscriber base, as reported by the TRAI Subscription Report and holds the prestigious sixth position globally among cellular operators within a single country, according to the GSMA Intelligence Database. Vodafone Idea’s pan-India network offers a diverse array of services. From voice and data to enterprise solutions and value-added services (VAS), including short messaging and digital offerings, the company remains committed to meeting the evolving needs of its clientele. Moreover, Vodafone Idea holds active licenses for national and international long-distance operations, internet provision and infrastructure services, facilitating seamless connectivity for both domestic and international clientele. Recently, the company undertook the largest follow-on public offering (FPO) in the Indian markets, raising a substantial sum of ₹18,000 crore. This capital infusion will be utilised for two crucial objectives, including the expansion and enhancement of network infrastructure, along with the settlement of outstanding payments for spectrum, signalling a strategic move towards bolstering financial stability and securing future growth opportunities. 

Financial Overview
Vodafone Idea boasts a market capitalisation of ₹89,819 crore. The promoters currently hold about 48.91 per cent of the shares, while FIIs and DIIs possess around 1.97 per cent and 2.2 per cent of the shares, respectively. Additionally, the free float of the company is at 14.69 per cent while the government holds 32.23 per cent of the shares. Looking at the quarterly financial performance of Vodafone Idea on a consolidated basis, in Q3FY24 the company reported revenue of ₹10,672.60 crore which marginally increased by 0.56 per cent as against ₹10,613 crore in Q3FY23. 

The EBITDA of the company also slightly surged by 4.06 per cent and stood at ₹4,350.40 crore as against ₹4,180.80 crore in Q3FY23. The net loss of the company contracted by 12.58 per cent to ₹6,984.80 crore as compared to a net loss of ₹7,990.20 crore in Q3FY23. Additionally, the EBITDA margins in Q3FY24 remained healthy at 40.76 per cent which improved by 137 bps as compared to Q3FY23, but were still lower than its peers. Considering the previous three quarters’ financial performance on a consolidated basis, in 9MFY24 the revenue stood at ₹31,998.40 crore, which marginally surged by 1.15 per cent as compared to ₹31,633.10 crore in 9MFY23. 

The EBITDA of the company also rose by 1.46 per cent to ₹12,790.20 crore as against ₹12,606.70 crore in 9MFY23. The net loss of the company expanded by 2.96 per cent to ₹23,560.90 crore in 9MFY24 as compared to net loss of ₹22,882.70 crore in 9MFY23. Its revenue growth was supported by an enhanced subscriber mix, increased additions to the 4G subscriber base, and modifications in the entry level plan. Capital expenditure for the quarter amounted to ₹330 crore, with total capital expenditure for the nine-month period reaching ₹1,300 crore. 

Furthermore, as of December 31, 2023, the total gross debt, excluding lease liabilities and including accrued interest not yet due, stood at ₹2,14,960 crore. This consisted of deferred spectrum payment obligations totalling ₹1,38,240 crore, AGR liabilities of ₹69,020 crore payable to the government, debt from banks and financial institutions amounting to ₹6,050 crore and optionally convertible debentures valued at ₹1,660 crore. The net debt position amounted to ₹214,640 crore, with a reduction of ₹7,140 crore observed in debt from banks and financial institutions over the past year. 

Additionally, looking at the company’s solvency and liquidity position, it has significant amount of liabilities which are greater than the assets of the company, making the shareholders’ equity negative. Moreover, the interest coverage ratio stands at -0.22 and the current ratio is at 0.23, which is really a cause for concern as the company is making losses at the EBIT levels and might not be able to cater to its interest payments. It may have liquidity issues as its current assets are just 23 per cent of its current liabilities. In short, the debt position of the company is the issue that comes to the forefront in terms of its overall financials. 

Sector Overview
According to the GSMA Intelligence Database, India ranks as the world’s second-largest telecom market. As reported by TRAI, India had 1,158.49 million wireless subscribers and 904.54 million internet subscribers as of December 31, 2023. The mobile telecommunications sector is a vital component of the Indian economy, contributing significantly to economic growth, GDP, government revenue and job creation. Over the past two decades, its growth has positively impacted the overall economy. The Indian mobile telecom industry comprises 22 service areas, including the three metro areas of Delhi, Mumbai and Kolkata and 19 other areas categorised as Circle A, B and C by the Department of Telecommunications, based on factors like affluence, infrastructure and revenue potential. 

Market Consolidation
Following the Supreme Court’s license cancellations in February 2012, numerous mobile telecom operators either withdrew from the market or substantially reduced their operations. Subsequent relaxation of regulations by the DoT regarding license transfers, mergers and spectrum trading and sharing between 2014 and 2015 further consolidated the market. Currently, the Indian telecom sector is characterised by three private and one public sector operator, providing an ideal setup for growth and robust competition. 

Market Share of Mobile Operators in Terms of Subscriber Base 

Average Revenue per User and Data Traffic per Mobile Connection
According to the TRAI Performance Indicator Report, from September 2016 to September 2023, the monthly blended mobile ARPU increased by 1.24 times from ₹120.98 to ₹149.66. During this period, average wireless data per subscriber per month increased by 82.82 times, and voice minutes of usage per subscriber per month increased by 2.59 times. These tariff increases were influenced by factors such as rising competition and a higher proportion of prepaid and rural subscribers. India’s ARPU remains low compared to other leading economies, suggesting potential for improvement to ensure better returns on investment. 

ARPU (USD Per Month) and Data Traffic per Mobile Connection 


Rising Penetration of 4G and 5G 

Despite yearly improvements in 4G penetration in India, a considerable number of 2G and 3G subscribers have yet to transition to 4G. Additionally, broadband penetration in India lags behind global counterparts, indicating substantial potential for increasing ARPU through a shift in the subscriber mix. 

Outlook
Vodafone Idea’s ₹18,000 crore follow-on public offering (FPO) is designed to achieve two critical objectives: first, to invest ₹12,750 crore in expanding network infrastructure, including the establishment of new 4G and 5G sites, and secondly, to allocate ₹2,175 crore towards clearing outstanding deferred payments for spectrum to the Department of Telecommunications (DoT), along with applicable Goods and Services Tax (GST). A reduction in Vodafone Idea’s bank debt is expected, potentially facilitating further funding from banks. While this capital injection is anticipated to strengthen the company’s immediate prospects, significant market share gains compared to peers are not foreseen. The company maintains a focused investment strategy across its 17 key service areas, which have significantly contributed to revenue. 

Vodafone Idea plans to upgrade its network infrastructure to meet increasing data demands and aims to provide 5G technology. Leveraging advanced 4G technologies and dynamic spectrum re-farming, the company aims to expand its LTE 900 and 2,100 MHz spectrum presence across 14 service areas. Furthermore, it aims to boost the average revenue per user (ARPU) by expanding its 4G network in rural and semi-urban areas and incentivising non-4G subscribers to migrate to higher value plans with unlimited data through targeted campaigns and collaborations with non-banking financial companies (NBFCs). 

Moreover, the audit and review reports of the statutory auditors of the company include a paragraph addressing material uncertainty and state that the company’s ability to continue is dependent on its ability to raise additional funds and make successful negotiations with lenders and vendors as required. Furthermore, looking at the valuation metrics, the company’s price to sales (P/S) ratio is at 2.2 times, which is substantially higher than its five-year historical median P/S of 0.7 times, and slightly below its industry median of 2.37 times. 

The EV/EBITDA is at 19.4, also higher than its five-year median EV/EBITDA of 14.2 and lower than its industry median EV/EBITDA of 27.51. Despite the company’s substantial efforts for growth through fund-raising and capital expenditure, which paints a positive picture for the future, one should also consider the significant amount of debt the company holds. This high level of debt increases the risk profile and raises questions about the company’s ability to continue operating, which, from the investors’ perspective, is a serious cause for concern. Hence, we recommend AVOID.