Q2FY24 Review: Vodafone Idea: Sub losses coming to grips; capex trips

31 Oct 2023 , 02:12 PM

Vi’s Q2 performance was decent – sub losses were the least since the merger in 2018, post-paid and 4G adds were respectable, and Ebitda grew 3% QoQ. An increase in payables and subdued capex aided Rs31bn FCF generation in H1FY24. On the earnings call, management stated that it expected to conclude fund-raising (including from promoters) in Q3FY24. The curative petition in the Supreme Court (SC) on the AGR verdict seeks allowing DoT to correct computation errors and removal of penalties. If Vi manages to pull off fund-raising and eventually get relief on part of the AGR dues, its prospects of becoming a competitive third player could become less daunting. It may also have to surrender some spectrum especially since spectrum debt accounts for two-thirds of its government liabilities. Analysts of IIFL Capital Services marginally tweak estimates and maintain REDUCE (TP: Rs10). 

Ebitda beat but capex stays low: 

Vi’s Q2 Ebitda grew 3% QoQ, with sub loss moderating to 1.6mn, along with healthy 4G and post-paid sub adds. Capex stayed low at Rs5.2bn in Q2. Analysts of IIFL Capital Services estimate that Vi generated Rs31bn FCF in H1FY24. 

Management targets tying up funding during Q3FY24: 

Key takeaways from the earnings call: 1) Lower SIM consolidation, modest 4G coverage and capacity improvements as well as participation in a government scheme limited sub loss; 2) The full benefit of entry level pack prices undertaken in 11 more circles (total: 15) in Q2 will flow through in Q3; 3) JIO Bharat Phone launch and lack of 5G have not had a significant adverse impact on Vi’s sub base; 4) Vi expects to complete fund-raising (including from promoters) during Q3, post which it would step up 4G and 5G rollouts; and 5) Rs8.2bn tax provision created following the recent SC order is based on conservative assumptions. 

Recent developments offer a ray of hope though the climb remains arduous: 

SC’s recent decision to consider hearing telcos’ curative petitions on the AGR case offers a ray of hope. If the AGR liability is brought down to telcos’ self-assessed levels (likely the best case scenario), the NPV benefit can be Rs460bn for Vi (Rs9/share). In such a scenario, Vi’s Rs305bn annual regulatory payout post-moratorium (vs. Rs413bn now) will be still stiff. If the DoT comes out with a spectrum surrender policy, Vi could further bring its obligations down by surrendering chunks of spectrum.