Brokers on Vodafone Idea: The Supreme Court’s dismissal of petitions seeking relief filed by telecom companies regarding calculation of adjusted gross turnover (AGR) has led to mixed reactions from brokers.
While the court’s decision is sentimentally negative, analysts believe a clear verdict removes a major hurdle from the stock price and provides insight into Vodafone Idea’s future.
“Despite its large debt load (which is manageable with government support), Vodafone Idea will be able to steadily recover and rebuild its business and benefit from the robust outlook for the Indian telecom sector in the coming years,” said Hemang Khanna, vice president-research analyst at Nomura.
The Supreme Court on Thursday dismissed the claims for compensation filed by telecom companies. The court sought review of the 2019 AGR verdict, which had allowed the Department of Telecommunications (DoT) to claim all non-telecom revenue as part of the total AGR payment.
Vodafone Idea, on the other hand, said its ‘self-assessed’ AGR debt stood at Rs 21,533 crore, against the DoT’s estimate of Rs 58,300 crore. So far, the debt-laden company has paid Rs 7,900 crore.
In the April-June quarter (Q1) of the current financial year 2024-25 (FY25), Vodafone Idea set aside Rs 70,300 crore as AGR dues and Rs 139,200 crore for spectrum payment. The total amount due at the end of the quarter was Rs 2.1 trillion.
Analysts believe that if Vodafone Idea has to weather the storm, it may need government support in the form of debt-to-equity conversion and/or an extended moratorium, and aggressive tariff hikes.
Way forward for Vodafone Idea
The Centre had granted a four-year moratorium to all telecom companies, ending in September 2025. After this period, Vodafone Idea will have to make payments of Rs 29,000 crore in March 2026 and Rs 43,000 crore in March 2027.
According to Nomura estimates, Vodafone Idea could generate EBITDA (earnings before interest, taxes, depreciation and amortisation) of Rs 22,400 crore in FY26, which could be used to partially meet government debt obligations.
If VIL can convert the Rs 12,000 crore owed into equity, it can potentially repay the remaining Rs 17,000 crore through its EBITDA.
“In FY27, VIL is expected to generate Rs 26,100-crore Ebitda. Clearing of dues is possible if VIL is able to convert Rs 17,000 crore of dues into equity and pay the remaining Rs 26,000 crore through its Ebitda,” the brokerage said.
However, analysts warn that higher EBITDA production will require significant rate increases, which could erode the company’s market share.
Even with the recent tariff hikes, Vodafone Idea appears to be losing market share to BSNL, analysts at Nuvama Institutional Equities noted.
Given limited visibility on 5G rollout, it would be difficult for VIL to retain its subscriber base, which would impact Arpu (average revenue per user) growth, which in turn would eat into cash flow, they noted.
“The tariff outlook has improved, but without AGR concessions, it would take at least 25-30 years (assuming 15 per cent Arpu CAGR) for Vodafone Idea to repay its liabilities organically,” Macquarie’s Aditya Suresh and Baiju Joshi point out in their note.
Vodafone Idea target price
Amid these concerns, shares of Vodafone Idea fell 19.7 percent on Thursday and another 5.6 percent on Friday in intraday trade. In comparison, the benchmark BSE Sensex rose over 1 percent (975 points) intraday to hit a record high of 84,160.
Analysts’ price targets for Vodafone Idea range from Rs 2.5 to Rs 15. The lowest price target has been given by Goldman Sachs, with a ‘Sell’ rating, as the company does not see any support/relief from the government in AGR liabilities.
Nomura, on the other hand, has upgraded the stock to ‘Buy’ with a target of Rs 15. “We believe the worst is over following the conclusion of the overhang, and the sharp fall in the stock price in the past few weeks presents an opportunity to buy the stock,” it said.
UBS also maintained its ‘Buy’ rating on the stock. “While the rejection of the petition by SC reduces the chances of a full exemption by the Centre, we do not rule out a share conversion or postponement,” the broker said.
Among others, Macquarie has an ‘Underperform’ rating; CLSA has an ‘Underperform’ rating (target: Rs 10); Nuvama Institutional Equities has a ‘Hold’ rating (target: Rs 11.5); and JM Financial has a ‘Sell’ rating (target: Rs 10).
First publication: Sep 20, 2024 | 11:07 AM IST