Vodafone Idea's shares might drop if its Q4 net loss widens; Kotak continues to recommend selling

Vodafone Idea said that it is in talks to raise up to Rs 10,000 crore in new non-fund-based facilities and Rs 25,000 crore with a group of banks.

Analysts at Kotak believe that because fast subscriber gains from Vodafone Idea are unlikely, other telecom carriers' priorities may change from grabbing land to making enough money via pricing increases.

On May 17, Vodafone Idea's stock is probably going to drop since the telecom company released some unsatisfactory results for the quarter that ended in March 2024. From Rs 6,418.9 crore in the same quarter last year to Rs 7,674 crore in the current quarter, its net loss grew.

However, compared to the same quarter previous fiscal year, the company's operating revenue climbed slightly, to Rs 10,606 crore from Rs 10,531 crore.

Changes in entry-level plans and subscriber upgrades were the main drivers of VI's growth in average revenue per user (ARPU), which gives insights into the income produced from each user. ARPU increased to Rs 146 from Rs 135 in the same quarter previous fiscal.

Additionally, the telecom company reported the greatest quarterly EBITDA since the merger, amounting to Rs 2,180 crore, or 5.4% YoY growth. Compared to a year earlier, Vodafone Idea's EBITDA margin increased slightly to 40.9 percent.

Following the biggest follow-on public offering (FPO) in Indian history, which raised Rs 18,000 crore, this is the telco's maiden earnings report. VI provided an update on debt fundraising, stating that it is in talks with a group of banks to obtain up to Rs 10,000 crore in new non-fund-based facilities and Rs 25,000 crore in debt financing.

Vodafone Idea said that it would use debt financing, equity financing, and non-fund-based facilities mainly for capital expenditures, which are projected to total between Rs. 50,000 crore and Rs. 55,000 crore over the next three years.

The capital expenditures will go toward launching 5G in strategic cities and regions, extending 4G population coverage in 17 priority circles, and improving capacity to meet the growing demand for data.

Calls for brokerage on VI stock

Vodafone Idea's high-risk, high-reward optionality is in place, but a number of conditions must be met, including more government relief measures, moderation in the intensity of competition, and VIL's execution to prevent further subscriber losses, according to Kotak Institutional Equities ahead of the company's March quarter results.

The brokerage said that the telco's latest fund-raise guarantees the medium-term survival of the 3+1 market framework.

Analysts at Kotak believe that because fast subscriber gains from Vodafone Idea are unlikely, other telecom carriers' priorities may change from grabbing land to making enough money via pricing increases.

In addition to their forecast of a 20 percent tariff rise in June 2024 after the general elections, they are factoring in a 15 percent tariff hike in December 2025 versus a 10 percent boost earlier.

According to our scenario research, Vi has a large risk-reward skew (bear case Rs 7 and bull case FV of Rs 23). The brokerage noted that although it has restored the 'Sell' recommendation on Vodafone Idea with a fair value of Rs 10, the long-term recovery still depends on the government's relief measures and a softening in the harshness of competition.

According to Kotak, its base scenario does not include an AGR dues waiver. However, a possible remission of Rs 35,000 crore might raise the share price by Rs 5 to its fair value.

Global trading firm Citi released a positive call on VI shares earlier this month. In its bull case scenario, for which it has set a target price of Rs 25, the brokerage anticipates additional 90 percent potential upside from the last closing price, after an 85 percent surge in Vodafone Idea shares over the previous year.

Its bull case is based on several key assumptions, including larger rate rises (20 percent each), which would raise FY28E ARPU to Rs 250; stronger subscriber additions; a drop in AGR debt of more than 50 percent (Rs 35,000 crore); and a 5x ratio of FY28E net debt to EBITDA.