Vodafone Idea shares fall 10% as fund-raise plan is good but not enough for Rs 2.5 lakh crore debt

Despite investors welcoming Vodafone Idea's plan to raise Rs 20,000 crore through the equity route, shares of the debt-ridden telecom player fell up to 10% to day's low at Rs 14.29 on Wednesday as the fund-raiser is expected to have a limited impact on its financials due to Rs 2.5 lakh crore debt pile.

"Operationally, this fund-raise is surely a step in the right direction. This will enable VIL to improve its 4G services and catch up (to some extent) with peers on 5G rollout, to be able to arrest the subscribers' decline and make meaningful EBITDA to be able to service the debt obligations. Financially, however, the fund-raise size is too small, to have any meaningful impact," said Nuvama's Vibhor Singhal.

Analysts also note that the significant equity component in comparison to the promoter’s commitment of up to Rs 2,000 crore can potentially mean VIL may be able to bring on some external investors, which has been in the works for a long time now. "If VIL is able to bring in external investors, it would be a significant positive for the company," Nomura said.


Also read | Vodafone Idea plans to raise Rs 20,000 crore via equity; promoters to participate
The total fundraise, comprising both equity and debt, amounts to Rs 45,000 crore and is expected in the next quarter.

In the near term, Nomura said that a significant fund-raise will be a material positive and will enable the company to cover upcoming dues, commence its 5G rollout, and improve its operational performance by curtailing the decline in the subscriber base in the near term and start growing the subscriber base again in the coming years.

"We note that if VIL can tie up the entire fund raise, it will be a material positive; however, VIL will not be fully out of the woods, in our view. Repair, recovery, and rollout of 5G will take time to fructify and will be crucial to an improvement in its outlook," it said.

VIL 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.

VIL’s subscriber declines peaked in FY22 at 24 million, following this, subscriber losses declined to 17.9 million in FY23. Improving its competitiveness in the industry and rolling out 5G should enable VIL to return to a growth trajectory in terms of subscriber additions, Nomura said.

VIL’s promoters had earlier infused Rs 4,500 crore in March 2022 to settle dues with Indus Tower and fulfill NCD repayment commitments. The government has converted the interest related to the four-year moratorium on deferred spectrum and AGR liability into equity in Apr’23. After the moratorium ends in FY26, the company’s annual obligation would be Rs 430,000 crore vs expected EBITDA of Rs 8,400 crore, presenting a significant risk.

"The significant amount of cash required to service debt leaves limited upside opportunities for equity holders, even with the potential operating leverage benefits from any increase in ARPU. Given the current low EBITDA, servicing the debt without external funding will be challenging," Motilal Oswal said.

Nuvama has maintained a 'reduce' rating on the stock with a target price of Rs 7. Nomura's stance is also the same with a target price of Rs 6.5. CLSA has a sell rating with an even lower target price of Rs 5.

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