Vodafone Idea stock can deliver more returns if debt overhang subsides

Bharti Airtel, however, is the safer bet fundamentally among the two companies.

Recent developments in the telecom space have been especially beneficial for Vodafone-Idea (VI) and Bharti Airtel, vis-à-vis Reliance Jio. While the government relief package includes a four-year moratorium on regulatory payments, the three telcos have gone for roughly 20-25 per cent tariff hikes. This gives VIL breathing space to manage debt, and raise ARPU (average revenue per user). Airtel was less stressed on the debt front. The moratorium would help, and the tariff hike should enable ARPU growth. Airtel may be in a position to start deleveraging in FY24.

VI’s obligations included Rs 22,000 crore in annual instalments towards deferred spectrum and AGR liabilities, debt servicing and capex of Rs 7,000-8,000 crore, and repayments of Rs 6,400 crore for NCDs between December 2021 and March 2022. The latter redemption is already due and must be completed by the end of Q4. The moratorium offers relief on Rs 22,000 crore; tariff hikes will help VI improve Ebitda by 65-70 per cent in 2022-23, which is a huge improvement.

This is assuming VI doesn’t lose significant market share. But the moratorium would mean that deferred spectrum and AGR dues would be much higher after four years. Even if VI takes the offer to convert interest into equity, it will still need to raise ARPU by roughly 2x (or find enough new subscribers). One problem is: The cash-strapped company has low capex. Airtel has over three times as much capex, while Jio has 5 times as much capex.

The annualised impact of tariff hikes is interesting. Assuming no major change in the market share and mature subscriber numbers, Jio may gain 20 per cent in the top-line and 25-27 per cent in Ebitda. Airtel may gain 9-10 per cent in the top-line and 13 per cent in Ebitda. VIL can gain 14 per cent in the top-line and 65 per cent Ebitda.

Airtel has gained 4 per cent mobile market share over the past four quarters and Jio has gained 1 per cent market share, both mainly at the expense of VI. Airtel could generate a 24 per cent Ebitda CAGR over FY20-21 to FY23-24 for India operations, assuming its market share remains unchanged.

If it gains market share, it can manage stronger revenue growth. Jio may gain double-digit revenue CAGR with steady subscriber growth. If VI cannot hold market share, there’s obviously additional potential for Jio and Airtel.

Airtel’s Africa operations are doing well, and Airtel Africa is expected to continue to post double-digit Ebitda growth. Consolidated operations should see gains from India tariff hikes, higher ARPU in all regions, and potential market share improvement. Jio may maintain its dominant market share, even if Airtel chips away at that. Jio also has cross-selling opportunities because of its retail plays.

Airtel has opportunities in fiber to home, where it is expanding to 2,000 cities (currently at 523 cities). Revenue in this segment should grow faster than 20 per cent, if current trends are maintained. Enterprise revenue could also grow quickly once 5G rolls out. Airtel’s data centre business is expanding capacity at a targeted 300 per cent over the next five years. The Airtel Payments Bank is hitting breakeven at Ebitda levels.

Vodafone Idea is up 39 per cent over the past month, while the Nifty has fallen 2.7 per cent. It is up 32 per cent in the last year; the Nifty is up 27 per cent. Airtel is down 4 per cent over the past month, and up 35 per cent in the past year. Airtel is obviously the safer bet fundamentally but VI may give better returns if it manages to service its debt overhang.