Vodafone Idea

We will remain as third private telco, not turning into a PSU – Vodafone Idea

Update on Indian Equity Market:

On Thursday, the benchmark Nifty50 made a record high of 17,844 and closed at 17,823 (+1.6%). BAJAJFINSV (+4.6%), HINDALCO (+4.5%), and LT (+3.7%) led the gainers. HDFCLIFE (-1.1%), DRREDDY (-1.0%), and JSWSTEEL (-0.6%) led the laggards. Among the sectoral indices, REALTY (+8.7%), FINANCIAL SERVICES (+2.3%), and BANK (+2.2%) led the gainers. MEDIA (-1.7%) was the only sector that ended in the red.

Excerpts of an interview with Mr. Ravinder Takkar, MD & CEO, Vodafone Idea (IDEA) published in Business Standard on 23rd September 2021:

  • The recent telecom package suggests the government recognizes the importance of the telecom industry. Also, it recognizes that competition in the industry is important and does not want a monopoly or a duopoly.
  • While the company has always stated it wants to be the third player, there have been questions around its survival. With the reforms, there is no reason to believe that Vodafone Idea will go away and the telecom market will have less than three players.
  • The four-year moratorium on the spectrum and AGR (adjusted gross revenue) dues will allow the company to make investments and continue to focus on the network. Their 4G network covers 1bn people currently and there is a potential opportunity to increase by 100-150mn. The company plans to increase its capacity, provide a great experience and introduce new services by deploying cash saved due to the moratorium.
  • The reforms package has addressed investor concerns and Mr. Takkar believes it’s a great opportunity to get external funding. The funding can come from new investors, existing promoters, or a mix of both.
  • The talks of Vodafone Idea being converted into a PSU or the government having a role in running the company are incorrect. The government wants the management of Vodafone Idea to run it efficiently and competitively.
  • The tariff has been one of the biggest challenges in the industry and pricing has been used as a tool to kill competition, gain market share, and create a scenario of stress.
  • To fix the industry, pricing has to improve and that has been the company’s stance for a long time. The reforms have created the right environment for price increases. Price increases will come soon and it will be gradual so that there isn’t a huge shock for the customers.
  • There are two elements in ARPU (average revenue per user per month) – pricing and customer mix. The difference with the competitor’s ARPU is due to the mix of customers. Vodafone Idea has a higher proportion of 2G customers. As migration from 2G to 4G happens, the ARPU is expected to improve. As pricing in the industry goes up, ARPU will go up for everyone.
  • The ARPU in India needs to increase to ₹ 200 as it was five years ago, and eventually increase to ₹ 300 for the industry to be sustainable.

Asset Multiplier Comments

  • The government’s relief package provides 4 years of moratorium on AGR and spectrum dues which are expected to reduce the payment burden for Vodafone Idea significantly. With the option to convert deferred dues into equity, the worst-case scenario is the company would be owned by the Government, which ensures survival.
  • Though the government’s relief package has provided a much-needed breather for the Company, it has to accelerate capex in 4G to recoup some of the lost market share. Additionally, increasing ARPU would help in strong cash generation.

Consensus Estimate: (Source: market screener website)

  • The closing price of IDEA was ₹ 10.6/- as of 23-Sept-2021. The consensus estimates of loss per share for FY22E/FY23E/FY24E are ₹ 9.2/ 6.8/ 6.0 /-.
  • The consensus target price is ₹ 6.5/-.

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