IIFL Securities turns bullish on Vi and Indus Towers

Driven by imminent tariff hikes post General elections in April/May 2024, and the government’s push towards ensuring a three-player market, brokerage firm IIFL Securities has turned bullish on the Indian telecom sector.

As it expects down-trading to be limited, considering the staple nature of telecom, the brokerage has upgraded Vodafone Idea stock to ‘Add’ with a target price of Rs 14 — an upside of 8.3 per cent from current levels.

It has also upgraded Indus Towers stock to ‘Buy’ with a target of Rs 379, and has raised Bharti Airtel stock’s target price to Rs 1,379 from Rs 1,215, and Jio’s enterprise value (EV) to $104 billion from$96 billion.

Vodafone Idea Ltd
“We believe that tariff hikes are imminent post elections, driven by the need for improvement in return ratios as Reliance Industries (RIL) is likely to consider an initial public offer (IPO) of Jio Platforms. With the government keen on ensuring a three-player market, we do not see the regulator frowning upon tariff hikes,” it said in a recent report.

What did IIFL Securities say about Vodafone Idea?
While upgrading the stock, the brokerage said a combination of significant fund raising, increase in average revenue per user (ARPU), and a potential favourable outcome in the adjusted gross revenue (AGR) verdict in the Supreme Court (SC) should provide a new lease of life to Vodafone Idea.

“With the government payouts even with some AGR liability relief and conversion of government dues into equity sizeable, Vodafone Idea will still have its task cut out. However, we see limited downside from the FPO price,” it said.

According to the brokerage, the Rs 20,000-crore equity infusion (if successful) would pave the way for debt raising (estimated at Rs 25,000 crore). This, the brokerage said, would enable Vodafone Idea to step up capex and narrow the gap on coverage and capacity versus peers. It estimates Rs 55,000 crore capex over financial year 2025-2027 (FY 25-27), likely helping stem subscriber churn.

That apart, supported by two rounds of “significant” tariff hikes, potential stabilisation of subscriber base, and 2G-to-4G upgrade, Vodafone Idea may see cash earnings before interest, tax, depreciation and amortisation (Ebitda) jumping almost 3 times between financial year 2024 (FY24) and financial year 2027 (FY27) to Rs 23,500 crore.

As regards AGR, IIFL Securities said, in 2020, self-assessment of AGR dues had yielded Rs 21,500 crore liability for Vodafone Idea. “Even after assuming interest since then, the liability could be Rs 30,000 crore. This compares with Rs 70,000 crore AGR liability currently on Vodafone Idea’s books. So a favourable outcome could yield over 50 per cent reduction in liability,” it said.

What did IIFL Securities say about Indus Towers?
With Vodafone Ideai’s financials improving, IIFL Securities no longer builds in Rs 1,000 crore provision for doubtful debts per annum for Indus Towers. Consequently, it has upgraded FY25/26 Ebitda estimate by 10 per cent/28 per cent. With improvement in working capital, net profit estimate has also been increased by 16 per cent and 44 per cent for the respective years.

“We expect Indus to reinstate dividend from financial year 2025 (FY25) as it again starts generating healthy free cash flow (FCF). We estimate Rs 4,000 crore/Rs 6,500 crore FCF generation in the financial year 2025/2026 (FY25/26). The stock is attractive at 4.5 per cent/7.2 per cent FY25/26 dividend yield,” it said.

What IIFL Securities said on Bharti Airtel, Reliance Jio?
While the brokerage is building a 20 per cent tariff increase in the second half of FY25 (H2FY25), it builds in another round of 15 per cent tariff increase in FY27.

“We also assume approximately 150 basis points (bps) lower steady state remote monitoring system (RMS) for Jio and Bharti versus earlier considering a more competitive Vodafone Idea. If we assume similar AGR relief as Vodafone Idea, Bharti Airtel’s Rs 36,000-crore liability could halve,” it said. Business Standard