Despite a better Q4, higher debt, AGR case weigh on Vodafone Idea stock

VIL’s data subscribers are down 1.4% in the March quarter on a sequential basis after registering a growth in the December quarter
Despite a better-than-expected performance in the March quarter, led by tariff increases in December, the Vodafone Idea stock shed over 4 per cent on Wednesday.

This is because, despite the improvement on the operational front, the Street is concerned about the increase in debt, overhang of the adjusted gross revenue (AGR) issue, and reduction in subscriber levels. 

The positive is the sharp increase in average revenue per user (ARPU) by 11 per cent on sequential basis to Rs 121 per month in the quarter (Q4) of financial year 2019-20 (FY20). The increase, though, was lower than Bharti Airtel’s 14.3 per cent growth to Rs 154, on a sequential basis. 
The lower ARPU and growth is because of Vodafone Idea’s higher share of rural subscribers and fewer data subscribers, compared with Bharti’s. Vodafone Idea’s data subscribers reduced 1.4 per cent in Q4 on a sequential basis, after registering a growth in Q3FY20. Within this, broadband subscribers reduced by about a per cent, compared to Bharti Airtel’s 7 per cent increase. 


The key gain for Bharti was the 10 per cent jump in its 4G subscriber base in the quarter, compared with a 1 per cent rise for Vodafone Idea. While Bharti’s overall data subscribers are 9 million more than Vodafone Idea, its 4G customer base is 31 million more than the latter, fetching it higher realisations per customer. 

Though its operating performance was weaker than Bharti’s, Vodafone Idea’s revenue growth was a robust 6 per cent on a sequential basis. The revenue increase was lower than ARPU increase because of a 4 per cent dip in customer base. Vodafone Idea is the only major player to report a fall in overall customer base. The other competitor, Jio, reported a 5 per cent increase.   
The impact of higher revenues and post-merger synergies was positive with operating profit jumping 28 per cent to Rs 4,380 crore. This did not percolate to the net level, given Rs 6,000 crore of exceptional items —including accelerated depreciation, increase in licence fee and spectrum usage charge payable to the Department of Telecommunications and bank guarantees for one-time spectrum charges. A 16 per cent increase in interest quarter-on-quarter (QoQ) to Rs 4,000 crore, too, added to overall costs, leading to a reported loss of Rs 11,643 crore.

While Vodafone Idea spent Rs 10,000 crore on capex in FY20, the firm will find it difficult to increase this in FY21 to catch up with competitors, given rising debt. Net debt rose 12 per cent to Rs 1.13 trillion on a sequential basis, with over three quarters of it being deferred spectrum liabilities. 

Analysts at Motilal Oswal Financial Services believe the company needs a 50 per cent hike in prices to generate operating profit of Rs 25,000 crore, which will be sufficient to service debt and fund capex plans. However, a lot depends on the outcome of the AGR case. Deferred payment of the dues, especially over a 20-year period, is vital, along with an improvement in cash flows for the company to survive. 

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