Voda Idea: Fund infusion not enough; stock can dip up to 22%, say analysts

Capital raise will provide some respite to Vodafone Idea, but a long and arduous path still remains to be traversed, say analysts

The Rs 14,500-crore fund raise by Vodafone Idea may not be enough to bring the debt-strapped telecom major out of the woods, say analysts. The announced fund-raise, they say, remains miniscule in comparison to VIL’s debt and it needs to further raise significant capital to repay existing dues.

"We note recent events such as converting interest on deferred liabilities into equity—Rs 16,000 crore of equity for 35.8 per cent equity (yet to be approved by DoT), the stake sale by Vodafone PLC in Indus Towers, and announced capital raise will provide some respite to VIL, but a long and arduous path still remains to be traversed, if VIL has to truly make it out of the woods," notes Kotak Institutional Equities.

On Thursday, Aditya Birla Group and Vodafone Group UK decided to pump in Rs 4,500 crore in VIL. The company will issue 3.38 billion shares at a share price of Rs 13.3 per share on a preferential basis to promoter entities—Euro Pacific Securities and Prime Metals (Vodafone Group entities), and Oriana Investments (Aditya Birla Group entity).

The issue price is at a premium of 10 per cent to the floor price of Rs 12.1 per share and 20 per cent premium to Wednesday’s closing price. The equity issue will lead to a 12 per cent dilution on the current equity base.

According to global brokerage Nomura, Vodafone Idea will be left with only about Rs 2,550 crore, after remitting funds to Indus Towers, which is not enough for the company's revival.

"The amount left for VIL to invest in its network from the fresh equity infusion would be Rs 1,000-2,000 crore. Considering its current net debt of Rs 1.97 trillion (30.5x leverage ratio), the deleveraging would be miniscule and the ability to raise annualized capex rate from the current Rs 4,000 crore would be limited. Significantly higher equity infusion and ARPU improvement are key to improving VIL's competitiveness," say analysts at IIFL Securities.

The Vodafone Idea board also approved a proposal to raise Rs 10,000 crore via equity shares or debt instruments, making it a total of Rs 14,500-crore fund-raising to revive the struggling telco.

Analysts say it is yet to be seen if any external strategic investors decide to participate in Vodafone Idea’s upcoming Rs 10,000 crore capital raise given the underlying challenges that the company faces.

As of September end, VIL had a gross debt of Rs 1.9 trillion comprising deferred spectrum obligation of Rs 1.08 trillion, AGR liability of Rs 63,400 crore and bank debt of Rs 22,770 crore.

VIL had non-convertible debenture (NCD) repayments of roughly Rs 6,400 crore due between December, 2021, and February, 2022. This has mostly been met and its next repayment is due only in September, 2023.

"The company has an annualized EBITDA of Rs 6,500 crore (third quarter of fiscal 2021-22; Q3FY22), which is sufficient to undergo maintenance capex. However, the same remains 25 per cent lower than that for Bharti Airtel/RJio, despite their higher scale/capacity. Further arrest of market share loss, which continued until Q3FY22, remains key for survival," says a note by Motilal Oswal Financial Services.

KIE, however, believes VIL may find it difficult to reverse loss of subscribers as it will remain behind Bharti and Jio on pan-India network capabilities (4G/5G) and service offerings (subsidized handsets, bundled plans, etc).

Nomura, meanwhile, highlights that VIL's external raise or debt recast must increase in capex for FY23 to ride external debt payments worth nearly Rs 5,400-5,700 crore over FY23-24.

The stock of the telecom services provider tumbled 7.6 per cent to Rs 10.23 apiece on the BSE in the intra-day trade on Friday, before closing 6.7 per cent lower at Rs 10.33 apiece. In comparison, the S&P BSE Sensex slipped 1.4 per cent.

Nomura has a 'sell' rating on the stock with a target price of Rs 8, while MOFSL has a 'neutral' rating with a target of Rs 9.8. IIFL Securities, too, has a 'reduce' rating with target of Rs 10.

Kotak Institutional Equities, on the other hand, has suspended its rating given lack of value creation and further potential large dilution expected from likely equity conversion on the deferment of AGR and spectrum liabilities of Rs 92,000 crore.