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Vi now looks more like a speculative stock, rather than a growth play

February seems to be ringing a happy tune for the beleaguered telecom service provider Vodafone Idea (Vi).

First came the bailout offer from the government last week that showed us that the company is too important to fail. Talks of debt refinancing and news of major stakeholder Aditya Birla Group seeking term loans to push its equity infusion plans might also bode the stock well came next.

Looking beyond the humongous Rs 2.2 lakh crore in debt, these developments might pull the business out of the rut, for now. However, fundamentals need more work to improve.

The government opens a few doors
The recent conversion of Rs 16,133 crore worth of Vodafone Idea’s interest dues into equity by the government made it the largest shareholder of Vi with a 33.4 percent stake in the company. This gives several opportunities to the telco to solve some of its problems.

JPMorgan believes that in order to drive capital expenditures for 4G and 5G, Vi’s fundraising ability will come into play. The brokerage firm’s analysis came in January when experts were still speculating whether the government will clear the conversion at all. Now, with the government’s conversion of some of the company’s debt to equity, raising capital should become relatively easier.

Choked under a debt load of trillions of rupees, Vi found a breather in the development. This is because the government’s acceptance of equity, instead of cash, as interest dues significantly reduced the number of parties Vodafone Idea is yet to refund.

Vi wasted no time in getting into the grind after the conversion. On February 13, ET reported that Vi is in discussions with State Bank of India (SBI), Punjab National Bank (PNB) and HDFC Bank to refinance loans of Rs 3,000-4,000 crore.

If this refinancing materialises, it can help alleviate some of the debt to the creditor companies. It can also free up some cash to meet the CapEx requirements that are staring at the company in the near future as 5G starts to roll.

The newspaper reported on February 15 that 32 percent stakeholder Aditya Birla Group seeks funds at the promoter level to pump up equity shares of Vodafone Idea. For this, the Group is in talks with global banks to raise term loans to partly fund the Rs 5,000-crore equity infusion planned after the government decided to convert dues into equity.

However, Vi still has a long way to go before its fundamentals could improve.

Brokerage house CLSA recently said that it believes that the company “will still be in crisis to fund annual spectrum payments beyond four-year moratorium”. The investment firm also believes that it might be difficult for the company to run CapEx unless the average revenue per user (ARPU) reaches around Rs 300.

In the December quarter, ARPU improved by 17.4 percent to Rs 135, which is a remarkable growth from Rs 67 read in 2019. The telco, however, continues to see a churn in its subscriber base, while its two largest rivals record a steady addition. Continued struggles to boost 4G operations led Vi to lose market share, slipping to the third position after Reliance Jio and Airtel in the quarter-ended September 2022, as per the Telecom Regulatory Authority of India (TRAI).

During the December quarter, the subscriber base of the company shrank to 22.86 crore from 23.44 crore in the second quarter of FY23.

Having been unable to match peers in investments towards telecom infrastructure like fibre and 5G, Vodafone Idea still needs billions of rupees just to catch up. Vodafone is yet to launch 5G services, despite having bought 5G spectrum in last year’s auction.

Although the government’s debt-conversion relief may speed up the process, the question of where Vi will stand when it enters the 5G game, and whether a duopoly between Reliance and Airtel will still be established in that area despite the government’s best efforts, still remains.

This is because subscriber shrinkage, competitive setbacks, and not to mention, the debt burden are key issues that are yet to be resolved.

Vi now looks more like a speculative stock, rather than a growth play, according to market analysts. Moneycontrol

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