Equity infusion may not aid Vodafone-Idea expansion

The huge debt of around Rs 1,12,500 crore of Vodafone Idea will leave little for capex and market-capturing strategies, even though the management is infusing some Rs 25,000 crore of equity.

Analysts at JPMorgan wrote on Thursday that Vodafone Idea “does not appear to be in a position to fund even basic capex, given the burdensome leverage”.

Even if the entire Rs 25,000 crore is used to service debt, the newly merged entity will be left with a debt of Rs 92,000 crore, taking into account interest cost, by the end of the current financial year, they added.

Analysts at Jefferies said: “The fundraising plans, if successful, will be a positive as it will provide comfort on the ability to complete its capex plans and fund the business over the next 18 month “.

Increased capex by Vodafone Idea, as expected by Jefferies and Goldman Sachs, could see competitive intensity sustaining over the next one year, longer than is expected after Jio started a price war.

On the contrary, JPMorgan expects the competition intensity to depend on RJio’s pricing stance which they believe “does not need to turn constructive, given RJio’s strong, sustained subscriber addition and top-line growth”.

Vodafone Idea’s combined capex for H1FY19 was Rs 5,700 crore compared with Airtel’s Rs 15,900 crore and more than Rs 32,000 crore by Jio. “While Vodafone Idea has recently increased capex, its overall spending remains materially below that of Airtel and Jio, continuing to put it at a disadvantage,” UBS said in a report on Thursday.

Goldman Sachs observed that should the company decide to divert the fresh equity towards capex, which has been relatively small and consequently hurt revenue growth, the interest outgo will remain high. “…this trend (of slower revenue growth) could continue for the next 2-3 quarters until network integration for the company is complete”, analysts at the firm noted.

The interest cost in Q2FY19 was Rs 2,166 crore. While the estimated interest outgo is Rs 7,566 crore for 2018-19, it is expected to go up to Rs 11,480 crore in FY20. Vodafone Idea’s net-debt-to-Ebitda ratio will remain at 15-16 times range —which JP Morgan termed “uncomfortably high” — compared with the current 29 times. Peer Bharti Airtel’s net-debt-to-Ebitda at the end of the September quarter was 4.65 times.

At the end of September, while Vodafone Idea (422.3 million) was the market leader in terms of total subscriber base ahead of Bharti (332.8 million) and Jio (252.3 million), it lost 13.1 million subscribers during the quarter compared with 11.8 million lost by Airtel and 37 million gained by Jio.

Even the average revenue per user of Vodafone Idea at `88 for the September quarter was lower compared with peers Airtel (Rs 100) and Jio (Rs 132).

The shares of Vodafone Idea on Thursday tumbled 11.10 %, or Rs 4.60, to close at Rs 36.85 apiece on a day benchmark Sensex gained 0.34%. Most equity research firms expect the stock to remain under pressure and under-perform the market. The management will contribute 73% of the fresh capital with `11,000 crore from Vodafone and Rs 7,250 crore from Aditya Birla. The remaining Rs 6,750 crore will be raised from the market either through rights issue, QIP or preferential issuance, among others.

Vodafone Idea — which was created on August 31, 2018, when Idea Cellular and Vodafone India merged — announced its first quarterly result on Wednesday, registering a loss of Rs 4,973 crore. The results take into account the one-month impact of Vodafone’s financials.