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Vodafone Idea not out of the woods yet, say analysts

Vodafone Idea has reported declining losses and improving free cash flow, but concerns still remain about its ability to compete with rival operators given the dip in capital expense and higher subscriber churn.

VIL continued to witness a decline in subscriber base for the eighth consecutive quarter and lost eight million subscribers in the September quarter, taking its subscriber base down to 272 million. The operator also shut down 1,145 sites on its network for the eighth consecutive quarter of site reduction.

During H1 FY21, VIL’s cash flow from operations jumped 70 per cent y-o-y, driven by higher EBITDA and a ₹2,300-crore swing in working capital on the back of higher trade payables. This, along with the 61 per cent y-o-y decline in cash capex to ₹2,000 crore, led to positive free cash flow (FCF) of ₹2,600 crore in H1 FY21 compared to negative FCF of ₹3,400 crore in H1 FY20.

Vodafone’s cash interest payout in H1 FY21 declined 84 per cent versus H2 FY20 to ₹1,300 crore due to a two-year moratorium on spectrum payments and six-month moratorium on bank debt. This enabled VIL to make debt repayment of ₹3,800 crore during H1 FY21.

“While VIL’s planned ₹25,000-crore capital raise may give it some breathing space and delay tariff hikes for the sector, in the absence of a material rise in its operating cash flows, its ability to make sufficient network investments may remain impaired. This will drive market share gains for Bharti Airtel, as seen in the second quarter,” said a research report from Jefferies.

VIL’s average revenue per user rose 4 per cent q-o-q to ₹119, however, it remains below Q4 FY20 levels. “Moreover, its revenues are lower than the pre-tariff hike levels. Average data usage at 12GB and voice usage at 673 minutes have been stable over the past two quarters and above Q3 FY20 levels, implying limited downtrading. Given this, the decline in ARPUs over the past two quarters could be a reflection of worsening subscriber mix,” Jefferies added.

Vodafone added 11,000 broadband base stations during Q2. While this will help improve its data services, its peers continue to invest more in network. In Q2, Airtel added nearly thrice the number of broadband base stations (30,000), increasing the gap with VIL to 80,000 broadband base stations.

“Capex remained below pre-Covid levels at around 10 per cent of sales, that is likely to keep network quality uncompetitive. Vi continues to be in a vicious circle of inadequate network investment, market share losses, and inability to invest in network driving further losses,” JP Morgan said in a research report. Business Journal

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