Q4FY23 Review: Vodafone Idea: Controlling the controllable

29 May 2023 , 02:42 PM

Vi’s Q4 performance marked an improvement across a number of operating parameters. Management stated how ARPU-improvement initiatives and cost control have helped; also expressed its inability to move first on tariff hikes. Vodafone Idea sounded more optimistic on fund-raising prospects, considering government backing (~33% stake post conversion of interest on moratorium into equity in February) and the return of Mr. Birla to the Board. Analysts of IIFL Capital Services believe that debt refinancing (Rs84bn due in FY24) should not be an issue; nor do they rule out some equity infusion from AB Group. However, a significant equity raise that could make Vi competitive may be difficult; especially as the threat of significant dilution looms once the moratorium is lifted in H2FY26.

Stable revenue but subdued capex: 

Thanks to higher revenue and lower costs, Vi’s Q4 Ebitda grew 0.7% QoQ — better than the estimated 5% decline. Government’s equity conversion reduced net debt to Rs2,090bn from Rs2,227bn QoQ, with the leverage ratio falling to 25x. Vi generated positive FCF in FY23. Sub losses improved; ARPU remained flat at Rs135; mobile revenue grew 0.4% after adjusting for fewer days. Vi’s capex remained subdued at sustenance levels.

Earnings call takeaways: 

1) Vi attributed its ARPU resilience to better subscriber quality. 2) Validity period of the entry-level plan in Mumbai has been reduced; extension to more circles may be considered based on the outcome. 3) With weaker 4G coverage than peers, Vi expressed its inability to move first on tariff hikes. 4) Lack of 5G hasn’t caused significant churn yet, but having 5G will be advantageous in the medium term. 5) Vi has rationalised channel payouts and has been making timely payments to vendors like Indus Towers.

Resilient performance amid challenges; long road to competitiveness: 

While Vi has been doing a decent job in controlling the controllable, balancesheet squeeze has resulted in capex freeze. Consequently, Vi lags peers on 4G coverage. Continued delay in funding could result in Vi falling behind on 5G-implementation. With >Rs400bn regulatory payouts looming from FY26, government may choose to convert principal into equity during the moratorium. In such a scenario, Vi could end up with >70% government ownership.

A significant equity raise that could make Vi competitive may be difficult; especially as the threat of significant dilution looms once the moratorium is lifted in H2FY26. Analysts of IIFL Capital Services largely maintain their estimates and TP of Rs6. Maintain REDUCE.