Nomura upgrades Vodafone Idea to 'Neutral'; sees 13% upside; details here

Vodafone Idea stock outlook: Global brokerage Citi, too, has assigned a 'High Risk Neutral' rating to Vodafone Idea stock with a target of Rs 15

Vodafone Idea stock strategy: Vodafone Idea's March quarter (Q4) results for financial year 2023-24 (FY24) have raised hopes that the telecom service provider may finally see the light at the end of the tunnel; even if the tunnel is long.

In a recent note, analysts at Nomura upgraded Vodafone Idea's stock to 'Neutral' and said Vi needs to traverse a long journey, but the tempest has largely passed and VIL is gearing up to meet clear skies ahead.

"We upgrade the stock from Reduce with a revised target price of Rs 15 (from Rs 6.5). The industry outlook has improved considerably with all players aligned on the need for Arpu (average revenue per user) hikes, and the industry setting into a 3-private player market," they said in their May 20 report.

Earlier, global brokerage Citi, too, assigned a 'High Risk Neutral' rating to Vodafone Idea stock with the same target price as it believes the stars are finally aligning for Vodafone Idea, following completion of its long-delayed equity raise.

"The government's backing, which we view as tantamount to doing what it takes to ensure that the three-player industry structure stays intact, has been instrumental in setting up the company for this turnaround. We are enthused by recent developments, with the Rs 20,000-crore equity raise (and over Rs 25,000-crore planned debt raise) enabling Vodafone Idea to accelerate network investments and narrow the gap with peers on 4G coverage and 5G rollouts," it said.

The target price of the two brokerages' implies an upside of around 13 per cent from Saturday's closing price. On Tuesday, meanwhile, Vodafone Idea stock price rose nearly 3 per cent to hit an intraday high of Rs 13.65 apiece on the BSE. By comparison, the benchmark S&P BSE Sensex was down 0.3 per cent at 10:40 AM.

Including Tuesday's gain, the stock of Vodafone Idea has advanced 3.8 per cent on the bourses since the announcement of its Q4FY24 results, after market hours, on May 16, 2024.

During the quarter under study, Vodafone Idea reported a net loss of Rs 7,674.6 crore, wider by 19.5 per cent year-on-year (Y-o-Y) and 9.85 per cent quarter-on-quarter (Q-o-Q).

The telco's revenue from operations rose less than 1 per cent Y-o-Y to Rs 10,606.8 crore, while Arpu increased to Rs 146 from Rs 145 in Q3FY24. Ebitda margin expanded 12bps Q-o-Q to 40.9 per cent.

Vodafone Idea lost 2.2 million subscribers (versus 4.6 million in Q3FY24). The company, according to analysts, is witnessing a gradual slowdown in subscriber loss; indicating the consolidation of dual sim cards, being largely behind.

On the expenditure front, capital expenditure (Capex) for Q4FY24 stood at Rs 550 crore (versus Rs 330 crore in Q3FY24). Net debt (excluding FLO) declined marginally to Rs 2.07 trillion (versus Rs 2.15 trillion in Q3FY24).

Going ahead, the management has guided capex to be in the range of Rs 50,000–55,000 crore over the next three years. Initial capex investment would be related to infrastructure upgradation with a gestation period of six–eight quarters. Management also intends to discharge the debt liabilities from internal cash generation (and equity conversion to GoI) and shall not be using newly raised capital.

That said, analysts caution that a lot needs to fall into place for Vodafone Idea to become an investable idea. Pace of subscriber loss, tariff hike (timing and magnitude), capex velocity, and developments on AGR/spectrum dues, they said, remain their key monitorables.

Against this, analysts at Kotak Institutional Equities expect Vodafone Idea to face a large cash shortfall (Rs 10,000 crore over FY2025-27, and higher Rs 74,000 crore over FY2028-32).

"Though we have raised FY25-27 Ebitda estimate by 2-5 per cent, Vi's long-term revival still hinges on the government's relief measures and moderation in competitive intensity. We await signs of Vi's subscriber base stabilisation and more clarity on potential GoI relief measures, before turning more constructive," they said with a 'Sell' rating and a target price of Rs 10.