Vodafone Idea share price surged 8% in early trade today, climbing to a high of Rs 12.80, after plunging over 20% in the previous session on Tuesday. Vodafone Idea stock was last trading at Rs 12.65 on Wednesday, up 7.2% on the National Stock Exchange (NSE). Earlier Tuesday, shares of the telecom major plummeted after the company’s board said that it will convert the entire amount of interest related to spectrum auction installments and adjusted gross revenue into equity. The move will see the government becoming the largest shareholder of the company, picking up nearly 36% stake in the firm.
Stock Talk: Vodafone Idea rating, target price
While the move will likely bring some relief for the embattled telco, domestic brokerage firm Edelweiss believes it may bring in other problems in the future. “This step will align with the interest of the financial stakeholders, as well as the shareholders of the company. However, significant government holding may dissuade potential investors, considering possible government intervention,” Edelweiss said in a note. “As the government becomes the largest shareholder, we will keenly watch its board representation. Strong increase in ARPU will be required for ensuring the financial interests of the government in VI are protected,” it added.
While the telecom package has definitely provided temporary relief to the company, significant ARPU growth remains the most critical factor for the company’s long term viability. Edelweiss has maintained its ‘Reduce’ rating on Vodafone Idea stock, and has kept target price unchanged at Rs 7.
Fundraising to get difficult for Vodafone Idea
Separately, Vodafone’s recent decision has further strengthened the scenario of a near duopoly market in the telecom sector as Bharti Airtel and Jio will be able to accelerate further market share gains at the expense of Vodafone Idea, said Kotak Securities after the equity conversion news. “The telco may find it difficult to raise large capital or generate adequate cash flows to invest in the network and reverse the loss of subscribers over the next few years, as it will remain behind Airtel and Jio on pan-India network capabilities as well as service offerings”, it added.
Earlier Tuesday, Vodafone Idea said in its regulatory filing, “Since the average price of the Company’s shares at the relevant date of 14.08.2021 was below par value, the equity shares will be issued to the Government at par value of Rs 10/- per share, subject to final confirmation by the DoT. The conversion will, therefore, result in dilution to all the existing shareholders of the company, including the promoters. Following conversion, it is expected that the Government will hold around 35.8% of the total outstanding shares of the company, and that the promoter shareholders would hold around 28.5% (Vodafone Group) and around 17.8% (Aditya Birla Group), respectively.”