Vodafone Idea needs to raise operational expenses savings target: Analysts

As shares of Vodafone Idea, the country’s second-largest telecom operator, continue to fall on the bourses, analysts say the firm’s operational expenses (opex) savings target will have to be raised than the guided Rs 8,400 crore as cash losses remain at elevated levels. 

The firm hired one of the Big Four consultants to take a re-look at its opex and drive additional cost savings. Vodafone Idea shares fell for the second consecutive day on Tuesday, ending the day’s trade at Rs 6.5, down 3.7 per cent. Reacting to the weak June quarter numbers, the firm’s shares tanked 27 per cent on Monday, eroding over Rs 7,000 crore from its market valuation. 

Analysts at Emkay Global said despite aggressive cost synergies, recent fundraising and partial revenue recovery, net debt to Ebitda ratio for FY21 (estimates) remains at an uncomfortable level of 10 times. Emkay revised its target price for the stock to Rs 5 and maintained a sell rating. 

In its note post the earnings call, Emkay noted that the opex savings target will have to be raised higher than the guided Rs 8,400 crore as cash losses remain at elevated levels. It went on to add that the company hired one of the  Big Four consultants to re-look into its opex and drive additional cost savings. 

“The management will highlight this aspect in the next quarter. Out of the 22,000 site reductions it planned, Vodafone Idea has so far cut 14,000 sites (10,000 in Q4FY19 and 4,000 in Q1FY20). As of now, there are no plans to accelerate the site reduction plan,” the report said. The firm had indicated in its earnings call on Monday that it hired the consultant to work with it on cost synergies. It is hopeful that it would be able to take out substantial amount of cost further. 

Motilal Oswal analysts said that an additional Rs 10,000-12,000 crore could be raised through monetisation of the Indus Towers stake sale and fibre assets and another Rs 5,000 crore through cash flow from operations. “Against this, Voda Idea has estimated annual cash requirement of Rs 28,200 crore (capex of Rs 12,000 crore, debt repayment of Rs 4,200 crore and interest cost of Rs 12,000 crore) over the next two financial years. Thus, the current cash plus additional monetisation opportunity could optimistically suffice for the next 4-5 quarters,” it said. 

Voda Idea’s Indus tower stake is roughly valued at Rs 6,160 crore while its fibre assets are currently valued at Rs 11,850 crore. By June 2020, the efforts towards network integration, capacity expansion and merger synergies are expected to boost the 4G coverage to 90 per cent. “However, until then, the subscriber churn coupled with cash flow crunch could risk the operating capability of the company,” said Aliasgar Shakir, research analyst at Motilal Oswal. Voda Idea’s wireless revenue decline in the June quarter was affected by continuous down trading by high average revenue per user (ARPU) customers and subscriber churn on minimum recharge plans. “The shrinkage in subscriber base by 102 million over the last three quarters is higher than estimated. Minimum recharge plan-led subscriber loss seems largely behind, while down-trading may continue in the ensuing quarters,” added Emkay.

Analysts said in some large circles, data market share is around 20 per cent while subscriber market share is around 30 per cent. The company is targeting subscriber conversion to data to boost revenue growth.

Revenue in Q1FY20 declined 4.3 per cent sequentially to Rs 11,270 crore (7 per cent below estimates), led by continuing high subscriber churn (it lost 14 million subscribers over the previous quarter). However, it was partly offset by a rise in ARPU of 4 per cent QoQ to Rs 108 (against an estimate of Rs 115) due to the minimum recharge plans.