Vodafone Idea Q1 Results Show Default Risk: Analysts

Vodafone Idea Q1 results underline the risk of a default, say analysts. The telco's cash flow is drying up, and the situation now has become that unless the government steps in, India will become a two-private player market. Analysts added that Vi’s high balance sheet leverage will trigger a further 3-4% cuts in its capex, which may be lower versus that of Bharti Airtel by at least $1 billion annually.

The Vodafone Idea Conundrum

Goldman Sachs have calculated a cash shortfall of ₹23,800 crore until April 2022. The brokerage firm said that the 4.7% decline in Vi’s revenue has caused a sharp fall in Vi’s EBITDA; the same fell by nearly 16% sequentially to ₹3,707.7 crore.

Worryingly, the firm estimated that even a 50% rise in Vi's ARPU, which stands at ₹104 currently, would result in an incremental EBITDA of just about $1.6 billion. Of course, that is way below the telco's repayment obligations.

Goldman Sachs said, "Vi may need to consider a combination of a significant capital raise and a large tariff increase in the very short term, else the company’s market share erosion could accelerate".

Further, BofA Securities said, "Vodafone Idea Q1 results indicate that the company continues to face structural headwinds, and unless the government steps in to aid, we see risks of India turning to be a two-player market”.

JP Morgan also echoed the same, saying, "Vi needs several levels of government and regulatory support to keep it viable, each of which is likely to benefit peers or dilute equity holders sharply". It added that Vi's debt burden has made the value of equity "virtually unforecastable".

On the other hand, Jefferies expressed its concern on the telco's lack of adequate investment in the network. The firm said that if the telco fails to put money in the network, "then market share gains for Bharti/Jio will continue". It added that Vi’s under-investment in its network has resulted in Airtel leading broadband base-stations from 61,000 to 2,15,000 Y-o-Y. "Bharti has added 46 million 4G subs over the past 4 quarters as against Vi’s 8 million, resulting in market share gains for Bharti", the firm said.

Government Relief Coming Soon

Multiple reports suggest that government will bring a relief package for the telecom sector by the end of this month. The package could include important policy changes, such as redefining AGR to exclude non-telecom items. The package can also include deferring spectrum payments and reducing bank guarantees. Basically, the government will try to reduce the burden on the sector, which has pushed Vi to the brink in the first place.

Jefferies added that any form of relief from the government would be an added positive for Bharti Airtel and Reliance Jio. But the present situation remains that Vi has to pay ₹58,254 crore to DoT for AGR; the telco has paid only ₹7,854 crore thus far. In the Vodafone Idea Q1 results, the telco said that its AGR liabilities stand at around ₹62,180 crore.