Everyone must have heard that one should never average down a falling stock. If there is a turnaround in sight, betting on a revival may be worth considering. But if nothing happens, buying at lower levels is like investing in a dead business. The reason is that you generate returns if a stock goes up, not down.
Yet many do the opposite and buy stocks during prolonged downturns. Take, for example, Yes Bank, Suzlon Energy, and Syntex Plastics, where many investors tried catching the bottom. All they did was catch a falling knife. They kept averaging when the stock was in a long-term downtrend, correcting over 90% until the share price settled in low single digits.
The same story has played out with Vodafone Idea (Vi). The number of shareholders has increased from 2.2 million in December 2021 to 5.4 million as of September 2024, a jump of ~145%. (Note: That’s the growth in the number of shareholders, not the share price.)
So, now that everyone has been punting on its revival, the question to ask is whether it is worth the risk? I have tried connecting the dots in this story.
Trouble started in 2007 when Hutch was renamed Vodafone. At that time, there were more than ten telecom operators in India, including Airtel, BSNL, Aircel, and Tata Indicom.
Smartphones and 3G started taking root, leading to massive subscriber growth. However, due to intense competition, telecom companies engaged in an enormous price war, which pulled down the sector's average revenue per user (Arpu).
Later, as Reliance Jio entered the industry in 2016, it triggered a fierce price war with free voice calls and inexpensive data. This caused the recharge value to take a significant beating, leading to further cuts in Arpu.
The industry went into consolidation, with many shutting down. Moreover, the Jio price war severely impacted existing companies Airtel, Vodafone, and Idea. Others, like BSNL and MTNL, were also severely affected.
With Jio in the driving seat, Airtel managed to fight it out. Vodafone and Idea merged in 2018 to form Vi (Vodafone Idea). At the time of the merger, Vi's net debt stood at ₹1.09 trillion, with net debt-to-Ebitda at 24x.
According to reports, the goal was to benefit from the merger synergy to the tune of ₹14,000 crore annually. The plan also aimed at operational efficiency and debt paring, which would have brought down the net debt-to-Ebitda to 8.6x.
However, the situation didn’t go as planned, making things difficult for the company. The apex court 2019 ruling regarding the “adjusted gross revenue" (AGR) calculation greatly affected it. Moreover, Vi had lost a market share of 19% after the merger.
According to reports, it was asked to cough up ₹58,300 crore as AGR dues. The companies were given 10 years until 2031 to clear their dues.
This, combined with continued subscriber churn and rock-bottom Arpu, left it with no capital to upgrade its network and introduce 5G. Vi tried to raise capital from investors but didn’t materialize due to its cash flow issues.
As of September 2021, it had a debt of ₹1.95 trillion, including deferred spectrum payment obligations of ₹1.09 trillion, an AGR liability of ₹0.63 trillion, and financial institution dues worth ₹0.23 trillion. It was tough for Vi to remain a going concern.
However, in 2021, the government offered the industry a four-year moratorium. By then, Vi had already paid ₹7,850 crore of its dues.
To save the ailing company, in 2022, the government also converted the accrued interest on its debt worth ₹16,100 crore into equity at ₹10 per share, giving it a 23.1% stake (as of 19 July 2024). It has also recently raised ₹2,070 crore from a promoter entity through preferential issues.
To support its revival, the company has planned a total of ₹45,000 crore in funding, including equity and debt. It aims to use the funds to repay some of its debt, pay vendors, expand its 4G network, and launch 5G services.
According to Mint, it raised ₹18,000 crore through an FPO in April this year. The FPO saw strong demand from foreign institutional investors like GQG, UBS, Fidelity, and Jupiter Fund. Motilal Oswal, HDFC Mutual Fund, and SBI General Insurance subscribed to the issue.
The shareholding of mutual funds increased from 2.06% as of Q4FY24 to 4.1% as of Q2FY25. On the other hand, the shareholding of foreign institutional investors (FIIs) rose from 1.97% to 12.69% during the same period.
Aditya Birla Group chairman Kumar Mangalam Birla cited the fundraising as a “fresh lease of life”. He added, “Vi will stage a smart comeback; this moment marks the beginning of Vi 2.0."
Vi has raised a total of ₹24,000 crore through equity issuance, including ₹18,000 crore through FPO. Now that it has raised funds, Vi can compete better. These funds will help it expand its 4G coverage and roll out 5G.
It also aimed to raise ₹25,000 crore in debt by late November. However, this loan has yet to be completed. Lenders want clarity from the government on any relief on AGR dues of ₹70,320 crore (as of Q2FY25). They also want the bank guarantee to be waived.
This sudden twist came after the Supreme Court rejected Vi's plea to recalculate the AGR dues. This funding was vital to expanding its 4G coverage and rolling out 5G. It would have also increased its competitiveness, helping arrest increasing subscriber churn and increase Arpu.
The moratorium is expected to end in September 2025. After that, it will have to pay ₹27,000 crore in FY26. Further, the payment is expected to increase to ₹41,500 crore per year from FY27 to FY31.
Kotak Institutional Equities estimates a cash shortfall of ₹10,400 crore over FY25-27. After the moratorium ends in September 2025, the shortfall is expected to jump to a massive ₹74,000 crore during FY28-32.
This makes survival difficult without meaningful cash flow or government support. As of September 2024, it had a total outstanding dues of ₹2.05 trillion. The worst part is debt is not coming down.
The industry recently increased prices by 20% to 25% in Q2FY25. The consensus estimates Vi Arpu to increase to ₹171-180 by FY25 end from ₹156 in Q2 FY25.
Moreover, as Airtel advocates, another price hike in FY26 will likely increase Vi's Arpu. However, Vi must stop losing subscribers to take full advantage of the price hikes. Even then, at least a 20-25% hike would not work for Vi.
Goldman Sachs says that to become Vi-free cash flow neutral, its Arpu will have to increase by 160% or ₹280. But it looks tough under the current scenario.
Macquarie estimates that even under optimistic conditions, such as a 20% immediate tariff hike followed by a 10% annual tariff increase without any subscriber loss, Vi would take over 20 years to generate enough revenue to repay its dues to the government organically.
This is especially true as its revenue market share plunged to an all-time low of 15% in Q1FY25. It also lost market share in 16 of the 22 circles in which it operates. As of June 2024, its customer market share stands at 18.6% (down from 34.6% in March 2017).
Its revenue has been stagnant for the last four years. Its FY20 revenue was ₹44,900 crore, which stood at ₹42,600 crore at the end of FY2024. However, it has reduced its losses from ₹73,900 crore to ₹31,200 crore during the same period.
The good part is that it is Ebitda positive. Its Q2FY25 Ebitda stood at ₹4,550 crore, with a margin of 41.6%.
However, it's already trading at a rich EV/Ebitda valuation of 15.9x, against its 10-year average of 14.3x. Its valuation is also high compared to Airtel's 12.7x. Its share price has also fallen 60% from its recent high.
With a subscriber base of ~220 million, Vi could fail, given its massive debt. If it indeed fails, it will be a devastating blow to the telecom sector, which will be pushed into a duopoly.
A duopoly is neither good for the industry nor the consumer. Therefore, one argument favouring Vodafone's Idea could be that the government would try to support and help the entity survive. But that’s hardly a strong investment case for the company.
Having said that, BSNL is also expanding its 4G network and aiming to introduce 5G in 2025. It has recently gained subscribers after private telcos' price hikes.
Amassed with government funding worth ₹2.75 trillion, can BSNL rise from the ashes as Vi goes down?
In a situation like this, to punt may not be the smartest decision. But then, who knows?
A totally unexpected development—think acquisition, full government bailout, massive new funding, or even a sharp uptick in revenues could suddenly make the situation look a lot better. And your punt could pay off. But then what are the chances of it happening? That’s what you need to factor in before betting on Vodafone Idea.
Meanwhile, for me, it’s a wait-and-watch situation at best, with too many unknowns.
Note: Throughout this article, we have relied on data from www.screener.in and Tijori Finance. Only in cases where the data was not available have we used an alternative, but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
Madhvendra has been a passionate follower of the equity market for over seven years. He is a seasoned financial content writer. He loves reading and sharing his honest opinion about publicly listed Indian companies and macroeconomics.
Disclosure: The writer does not hold the stocks discussed in this article.
