Sell Vodafone Idea For 50% Downside Gain: ICICI Direct

Still far from comfortable outlook!

In Q3FY21, Vodafone Idea’s (VIL) reported revenues were up 1% QoQ to Rs 10,894 crore, with ARPU growth of ~1.7% QoQ to Rs 121. The subscriber base declined by ~2 million to 269.8 mn, with churn rate reducing to 2.3%. Reported EBITDA margins were up 86 bps QoQ to 39.3%, on account of change in accounting of subscriber acquisition costs that aided reported EBITDA by ~Rs 330 crore. The EBITDA margin (ex-Ind-AS 116 impact), adjusted for one-offs was at 16.3% vs. 15.5% in Q2. The loss was at Rs 4532 crore, aided by lower depreciation costs and one-off exceptional items of Rs 1696 crore (benefits of Rs 2119 crore towards profit on sale of stake in Indus Tower partly offset by charge towards integration related costs, provision for additional depreciation and one-time spectrum charges).

Overall churn rate moderates; post-paid base loss continues…

Some improvement was seen across KPIs. The subscriber base declined by ~2 million (mn) to 269.8 mn (much lower than last four quarter’s run rate of ~9.8 mn decline), with churn rate reducing to 2.3% (vs. 2.6% in Q2FY21), which, we believe, is due to network integration completion. The 4G sub base saw a modest addition of ~3 mn QoQ to 109.7 million, albeit better than 1.5 mn addition in Q2. The post-paid sub base at 20.8 mn, however, was down by 0.4 mn QoQ. Similarly, capex at Rs 970 crore (vs. ~Rs 1040 crore in Q2) was underwhelming, given the balance sheet stress. The net debt at Rs 1.171 lakh crore was up by ~Rs 2570 crore QoQ, notwithstanding net receipt from Indus Tower sale of Rs 1,360 crore (receipt of Rs 3,760 crore from sale of stake offset by Rs 2,400 crore of prepayment).

Accounting change/cost rationalisation aid EBITDA

The reported EBITDA was aided by a change in accounting of subscriber acquisition costs that is now amortised over the average expected customer life (positive impact of ~Rs 330 crore). Of the Rs 4,000 crore of further annualised cost savings over next 18 months, ~50% was realised by the company by the end of this quarter (vs. 25% in Q2), thereby aided EBITDA. VIL’s board has approved funding raising of up to Rs 25,000 crore through a mix of debt. The company is in active discussion with potential investors and expect the fund raise soon. Similarly, on the tariff correction front, without indicating exact timeline, it has indicated that tariff hike (likely in near term) and/or floor tariff implementation will be key.

Valuation & Outlook

VIL remains the weakest private telco. While AGR dues payment extension was a short-term breather, its survival hinges on quick capital infusion and tariff hike/floor tariff implementation. The need for capitalisation is of paramount importance mainly due to its lagging spends on network and relative market share loss. We maintain SELL with DCF based TP of Rs 6. We will monitor triggers like fund raise, tariff hike, before changing our stance.