Should you subscribe to Vodafone Idea FPO? Analysts weigh in

Cash-strapped Vodafone Idea’s (Vi) Rs 18,000 crore follow-on public offering (FPO) scheduled to open for subscription on April 18, 2024. Its anchor book, however, will open on April 16, 2024.

The primary objectives of Vodafone Idea FPO include boosting existing 4G infrastructure, establishing new 4G and 5G sites, and settling certain deferred payments for spectrum to the Department of Telecommunications (DoT), along with associated GST obligations.

But, should you subscribe to Vodafone Idea FPO given the growth of its counterparts, Reliance Jio and Bharti Airtel, who have seen consistent rise in customer addition, and speedy rollout of 5G?

Analysts say while the fundraising could strengthen Vodafone Idea’s infrastructure, the company faces challenges on the financial front. Unlike its competitors, Vodafone Idea has experienced a consistent decline in its user base.

“A potential financial crunch looms in 2026 when significant spectrum and adjusted gross revenue (AGR) dues of up to $4 billion become payable for Vodafone Idea. Despite the discount of 15-17 per cent, Vodafone Idea’s path to a near-term revival seems uncertain, said Shivani Nyati, head of wealth at Swastika Investmart.

For investors looking to subscribe to the Vodafone IPO, she suggests they carefully consider the above-mentioned factors before putting in their hard-earned money.

Kishor Ostwal, managing director at CNI Research, too, remains sceptical on the returns that the investors will be able to generate in the Vodafone Idea stock going ahead. Vodafone Idea's business model, he said, is not worth appreciating considering the fact the company will always be short of funds for 5G and 6G technology.

"This share is highly speculative hence one can enter with high risk for 20-30 per cent kind of returns. But on fundamentals, my call is to avoid there are better options where one can get a much better return. That said, the government will never sell its stake easily. Also, the fact to be kept in mind is that once its promoters had said that they do not have money and prefer to shut the company. Such comments clearly are against the interest of the shareholders and shows low integrity. My suggestion is to avoid the FPO," Ostwal said.

On a slippery slope

On the operational front, Vodafone Idea has already seen a loss of 17 million wireless subscribers over the past one year, of which 1 million were lost in the month of January 2024 alone. By comparison, Reliance Jio added about 4.2 million wireless subscribers in January 2024, while Bharti Airtel added 0.75 million subscribers, according to the latest data released by the Telecom Regulatory Authority of India (Trai).

“Market scepticism persists regarding Vodafone Idea's ability to gain significant market share going ahead. In the worst-case scenario, minority investors may face limited upside potential as government ownership could surpass 80 per cent in a fully diluted scenario. Diligence is paramount for informed investment decisions,” said an analyst.

Thus far in calendar year 2024 (CY24), Vodafone Idea stock has dropped 24.1 per cent as compared to over 1 per cent rise in the S&P BSE Sensex. Bharti Airtel stock, its peer in the telecom sector, meanwhile, has gained 20.90 per cent during the same period.

Analysts at CLSA, meanwhile, suggest shares of Vodafone Idea could drop as much as 61 per cent to Rs 5, if the beleaguered telecom company continues to see subscriber churn.

Those at Nomura, too, expect Vodafone Idea stock price to drop to Rs 6.5 levels and maintain a 'reduce' rating on the stock. Despite the fundraise, Vodafone Idea, they said, will still not be fully out of the woods. Repair, recovery and rollout of 5G for Vodafone Idea will take time to fructify and will be crucial to an improvement in its outlook.

"Vodafone Idea also faces significant government dues pertaining to adjusted gross revenue (AGR) and spectrum liabilities, albeit some leeway from the government in the form of extended timelines for payments can be a possibility — the government has repeatedly clarified its intention of maintaining a three-private-player market," wrote Hemang Khanna of Nomura in a recent report.

Some analysts, however, remain optimistic. Utkarsh Sinha, managing director at Bexley Advisors, a boutique stock advisory firm, for instance, believes that Vodafone Idea is here to stay and will find its niche between volume-driven Jio and ARPU-oriented Bharti Airtel.

“In the Jio-Voda-Airtel trinity, Vodafone Idea lies in the middle in terms of its ARPU versus penetration aspirations. While Jio is keen to have the maximum number of subscribers, albeit lower paying ones, Airtel is aspiring for the higher end of the market with greater penetration amongst high ARPU users. Vodafone lies in the middle, which also means it must compete at both ends and consequently, that its capex outlay must be higher in comparison,” Sinha added.

During the FPO press conference held on Monday, April 15, Vodafone Idea's Chief Executive Officer, Akshaya Moondra, affirmed the company's commitment to rolling out 5G services post-FPO, highlighting their readiness with a 5G-ready radio architecture. 

Furthermore, reports suggest that Vodafone Idea has already allocated Rs 5,720 crore for the rollout of 5G services from the Rs 18,000 crore it expects to raise from the follow-on public offer (FPO).

On Vodafone Idea FPO pricing, Moondra clarified that the pricing decision for the FPO rests solely with the company, asserting that the government, holding a 32 per cent stake in Vodafone Idea, has no influence over the pricing strategy. 

Stressing upon growth strategies, Moondra underscored the importance of Average Revenue Per User (ARPU) enhancement, citing comparative ARPU figures between China and India. Vodafone Idea's China ARPU is at $ 6.64, as opposed to India's $2.08.

Acknowledging minimal capital investment over the past ten quarters, Moondra outlined the telco's focus on managing cash flows and making strategic investments. 

Despite the competitive landscape, with rivals Bharti Airtel and Reliance Jio already having launched 5G services in various parts of the country, Vodafone Idea remains determined to carve out its niche in the market.

IPO details

The Vodafone Idea FPO, comprising a fresh issue totaling 16.36 billion shares, is scheduled to open for subscription on April 18, 2024, and close on April 22. 

Vodafone Idea aims to list the FPO-issued shares on both the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) on April 25, 2024.

The price band for the Vodafone Idea FPO is set at Rs 10 to Rs 11 per share, with a minimum lot size for retail investors of 1,298 shares. 

Axis Capital Limited, Jefferies India Private Limited, and SBI Capital Markets Limited are appointed as the book running lead managers for the Vodafone Idea FPO, with Link Intime India Private Ltd serving as the registrar for the issue.