Vodafone Idea stock plunges over 26% on weak June quarter result

Since launch of minimum service recharge plans firm loses 67 mn subscribers

Reacting to the weak June quarter (Q1) results announced by Vodafone Idea on Friday, the shares of the telco fell by 26.8 per cent on the BSE on Monday. The Street reacted to the 4 per cent sequential fall in revenues, a result of the firm’s strategy to weed out low-revenue customers by implementing minimum recharge plans.

The move to weed out low-revenue users cost the telco 14 million subscribers in Q1 and analysts predict further erosion, as they feel the strategy may have backfired. The minimum recharge plans kicked in around November last year. Since the December quarter of 2018-19, Vodafone Idea has lost 67.2 million subscribers, and, in the bargain, gained Rs 20 in its average revenue per user (ARPU). ARPU is a function of total revenue of a telco upon the total user base.

A shrinking user base boosts ARPU, but analysts feel that it is not the only metric to measure performance. The firm’s rival, Reliance Jio, has focused on gaining customers even if that has reduced its ARPU consistently. In June, Jio toppled Vodafone Idea to gain the crown of India's largest telecom player by subscribers. Since the December quarter, Vodafone Idea also lost Rs 11,500 crore worth market capital from Rs 30,967 crore at the end of November. As of July 29, the telco’s m-cap stood at Rs 19,454 crore. This, after Rs 25,000 crore was infused through a rights issue around April. The firm has launched new plans to stem the damage from subscriber loss and ARPU down trading, the management said.

“We’re realising that these customers recharged with Rs 35 or similar vouchers once, second and third time, and then started looking for better value somewhere else. For such needs, we have come up with a voucher of Rs 45. The initial indications were encouraging, so last week this product was taken to all of India. We are confident of improving churn as well as ARPU,” Vodafone Idea Chief Executive Balesh Sharma said in an earnings’ call on Monday.

The management also witnessed some down trading of high ARPU customers, primarily as they moved from unlimited voice and data plans, priced at Rs 169 plus, to the unlimited voice and fixed data plans, priced at Rs 119 or Rs 129. This is because the primary need for these customers was voice.

Clearly, there is a lack of traction from data users, pushing them to voice heavy plans, which the company hopes to control through better promotion. Sharma also said the company faced some teething problems after consolidating their distributor base across markets, which also had an impact on sales. “We are now running hyper-local promotional campaigns targeting specific cities and districts,” he said.

“We estimate a funding gap of Rs 18, 000 crore in FY21 (including debt repayments) for Vodafone Idea, which can potentially be met through fibre sale and equity raise. Net debt will keep rising until Ebitda crosses Rs 25,000 crore, which will likely happen in FY24,” wrote Sanjay Chawla, research analyst, JM Financial. Vodafone Idea’s performance has prompted analysts to reassess their estimation of Bharti Airtel’s Q1, since stable Q4 numbers had indicated the sector was on its way to recovery.