At 6.75, Vodafone Idea shares show the firm is hanging by a thread

Mumbai: Shares of Vodafone Idea Ltd slumped 27% on Monday and now trade at merely 6.75 apiece. 

When Vodafone India Ltd and Idea Cellular Ltd had announced their merger in March 2017, they had envisaged a far greater value for the stock. At that time, the merger pact included a clause that gave Idea Cellular’s promoter the right to purchase shares in the merged entity from Vodafone Group Plc at 130 per share.

The enormous value erosion points to something analysts and industry experts have been saying for a while—“Vodafone Idea is hanging by a thread". But the chorus appears to have increased lately, with the company’s financial position deteriorating rapidly.

Vodafone Idea’s June quarter earnings show that based on its current cash burn rate, the company’s funds may suffice for only about four-five quarters. “The business can be funded till June-July 2020, assuming no debt refinancing and no tariff hike," analysts at JM Financial Institutional Securities Ltd said in a note to clients.

As such, Vodafone Idea’s fortunes rest largely in the hands of Reliance Jio Infocomm Ltd, which has refrained from raising tariffs, despite attaining market leadership and notwithstanding large cash burn on its own books. With the so-called market repair nowhere in sight, Vodafone Idea appears to be headed towards being a regional telco in the best-case scenario, or towards oblivion in the worst case.

The company’s troubles are many. To start with, its June quarter revenue declined 4.3% to 11,270 crores from the preceding three months. In comparison, Reliance Jio grew revenue by 5.2% to 11,679 crores and became the clear market leader in the process.

The divergent performance reflects the vast difference in the 4G capacity of the two companies. “We reckon Vodafone Idea has around 150,000 unique 4G sites, compared with Jio’s 260,000+ sites," analysts at JM Financial said in a note to clients.

While Vodafone Idea has been trying hard to play catch-up with its network coverage, its precarious financial position doesn’t allow it the luxury of splurging on capital expenditure (Capex). “Capex in the quarter stood at just 2,840 crores, lower than even Q419 ( 3,200 crores). Despite having lower 4G coverage and lower data capacity, Vodafone Idea’s Capex has been much lower than peers and even its own guidance ( 16,000 crores + in FY20)," analysts at Jefferies India Pvt Ltd said in a note.

On a call with analysts, the company gave the impression that it would conserve cash rather than go ahead with all of the CAPEX it had earlier guided for. The caution is understandable. Investors, who bought shares in the company’s rights issue at a seemingly low price of ₹12.50 just three months ago, have lost nearly 50% of their investment. About a year before that, investors had bought shares at ₹88.50 per share in a qualified institutional placement. They have lost over 90% of their investment. To add to this, market conditions are weak, which makes fundraising nearly impossible.

But curbs on investment hurt customer experience and lead to subscriber churn. The decline in Vodafone Idea’s revenue and subscriber base points to “eroding consumer mindshare and perception, driven primarily by Vodafone Idea’s 4G coverage/capacity deficit relative to Bharti and Jio", said JM’s analysts.

The company lost 14 million subscribers in the June quarter, taking the losses in the past year to about 115 million users. “Its 4G coverage now extends to 830 million people, vs. Airtel’s 1 billion and Jio’s 1.2 billion," JM’s analysts said, elaborating on the coverage deficit.

As the chart shows, the drop in revenue also resulted in a huge drop in profits. Earnings before interest, tax, depreciation, and amortization (Ebitda) fell 22% to 1,240 crores, after adjusting for one-offs. This translates into an Ebitda margin of 11%, almost the same as what the merged firm reported for the year-ago June quarter. Note that Vodafone Idea has now achieved 70% of its targeted operating expenses synergy gains, which wasn’t the case a year ago. Importantly, the Ebitda last quarter was less than half the company’s net interest cost.

With little left to come in terms of synergy gains, all hopes lie on the elusive market repair Vodafone Idea has been hoping for.

There could be some relief if the government decides to save the distressed telco by extending the moratorium on spectrum-related payments. After all, nearly 80% of the company’s debt is owed to the government. But for Vodafone Idea to come out of the hole it finds itself in, Jio needs to play ball and raise tariffs. Vodafone’s battered share price of 6.75 shows hardly anyone is betting on that.

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