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3QFY23 Results Update on Vodafone Idea, Motilal Oswal

VIL posted a 6% QoQ decline in EBITDA (pre Ind AS-116) despite a 3% ARPU growth and a 110bp SUC gain. The EBITDA decline was a result of higher subscriber acquisition costs, increased network costs and a 6m subscriber loss. Capex decreased by 40% QoQ due to its inability to raise funds.

The continued subscriber loss and a slow 4G/5G rollout (subject to capital infusion) are expected to dilute earnings. FY23E EBITDA of INR171b may not be sufficient to meet debt repayments, intensive capex needs and the ability to compete fiercely to retain market share. We reiterate our Neutral rating.

SUC benefits offset high subs acquisition costs; EBITDA down 6%

  • Revenue was flat QoQ at INR106b (in line), aided by 3% QoQ ARPU growth. However, the subscriber base continued to decline, down 6m or 2% QoQ to 229m. Bharti/RJio reported a 2%/1% QoQ rise in ARPU to INR193/INR178 and subscriber adds of 4m/5m.
  • Reported EBITDA grew 2% QoQ to INR42b (in line). However, pre-IND-AS 116 EBITDA declined 6% QoQ to INR20b (7% below est).
  • SUC gains of 110bp (INR1.1b) offset the 16% QoQ increase in subscriber acquisition costs (INR1.8b).
  • Reported EBITDA margin improved by 80bp to 39.4%, while pre-IND-AS 116 EBITDA margin declined 110bp QoQ to 18.8%.
  • Net loss widened to INR80b (14% miss) due to an increase in finance costs.
  • Net debt increased by INR26b to INR2,227b, which primarily included Spectrum and AGR debt.
  • Capex decreased 40% QoQ to INR7.5b. Bharti/RJio’s annual network capex has been significantly above VIL despite having higher capacity.

Highlights from the management commentary

  • VIL has seen market share benefits from price actions taken by peers in the minimum recharge segment. It wants to focus on unlimited data plans, instead of the lower segment, to ensure that higher usage is charged additionally.
  • VIL is working with multiple partners to improve services to enterprise customers by offering cyber security, extending the cloud portfolio, and offering IoT-based innovative solutions.
  • Out of INR132b of bank debt, nearly INR80b is payable in the next one year, while the four-year spectrum moratorium will end on Oct’25 and AGR moratorium on Mar’26 leading to a combined annual installment of ~INR430b.
  • VIL is awaiting the completion of its fund raise to start 5G rollout. It is engaging with banks, which earlier required Govt conversion.

Valuation and view

  • Key positive factors include: 1) a 30%+ increase in ARPU in the last six quarters on the back of tariff hikes and customer upgrades, and 2) consistent 4G subscriber additions. However, the continued subscriber churn underscores its weakening market position, diluting the earnings growth opportunity needed to become self-sustaining.
  • The recent share issuance to the Government for interest on NPV has ceded a 33% equity stake for merely the interest component, with net debt ballooning to INR2.2t. It will yet increase the annual government installments to ~INR430b from FY26 onward, much above its annual cash generating capability.
  • The much-awaited capital raise remains critical to providing immediate liquidity for network expansion.
  • The significant amount of cash required to service debt leaves limited upside opportunities for equity holders, despite the high operating leverage opportunity from any source of ARPU increase. The current low EBITDA will make it challenging to service debt without an external fund infusion. Assuming 11x EV/EBITDA with net debt of INR2.2t leaves limited opportunity for equity shareholders. We reiterate our Neutral rating.

For report,

CT Bureau

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