Vodafone Idea stock ‘under review’, Q2FY20 operating performance along expected lines

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Published: November 19, 2019 1:46:46 AM

In our view, given the potentially dire repercussions of AGR liabilities, the government may intervene, but the nature of its solution/support has wide-ranging possibilities and, given Idea’s leverage, the impact thereof could greatly vary. Hence, we are putting the stock ‘UNDER REVIEW’.

Vodafone Idea, Vodafone Idea stock, Q2FY20, Vodafone Idea news, Vodafone Idea share, Vodafone Idea india, Vodafone Idea share priceIDEA’s revenue dipped in the wake of a decline in subscriber base by 8.9 mn that was partially offset by sustained ARPU of Rs 107. (Image: Reuters)

Vodafone Idea (IDEA) posted marginally weak Q2FY20 results with revenue dipping 3.8% q-o-q (Street: 3.1% decline) and Ebitda margin at 30.9% margin (Street: 32.7%). The company provided for Rs 257 bn in Q2FY20 against earth-shattering AGR-related liabilities of Rs 441 bn, leading to a staggering net loss of Rs 509 bn. Adjusted loss is Rs 46 bn versus Rs 43 bn forecast by Street. Management highlighted that, if the government does not intervene, AGR liabilities threaten its existence (going concern); it thereby urged government intervention via a recommendation by the Committee of Secretaries (COS) to redress the matter.

In our view, given the potentially dire repercussions of AGR liabilities, the government may intervene, but the nature of its solution/support has wide-ranging possibilities and, given Idea’s leverage, the impact thereof could greatly vary. Hence, we are putting the stock ‘UNDER REVIEW’.

Operating performance: Along expected lines
IDEA’s revenue dipped in the wake of a decline in subscriber base by 8.9 mn that was partially offset by sustained ARPU of Rs 107. We see a revival in 4G subscriber addition—5.5 mn in Q2FY20, which takes the total 4G subscriber base to 90.3 mn. Management ascribed ‘some revival in subscriber addition’—after months of decline in revenue and subscriber base—to 4G network expansion. We believe that the company’s success hinges on its ability to retain 4G market share.

Government intervention? Many possibilities
In absence of any government bailout or a stay by the court, IDEA will have to cough up Rs 441 bn by 24 January, 2020. Given the company’s already precarious financials (7x net debt to TTM Ebitda), it may not even be able to garner the funds, which would necessitate government intervention. We believe the government has the following options, among others, at its disposal: (i) waiver of AGR liability and/or interest and penalties thereof; (ii) reduction of licence fee and SUC rates; (iii) moratorium for spectrum payout as well as AGR liabilities; (iv) tariff floor. We would support government intervention, but are unsure what action it might take, if at all.

Outlook and valuation: Challenging times; ‘UNDER REVIEW’
We believe how IDEA fares in navigating this challenge hinges on CoS’s recommendation. Given uncertainty thereof, we are putting the stock UNDER REVIEW until more clarity emerges. The stock is trading at 8.8x FY21e EV/Ebitda.

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