Kotak Institutional Equities said in a recent note that Vodafone Idea Ltd. (VIL) is pursuing its high-risk, high-reward option, but that in order to prevent further subscriber losses, a number of conditions must be met. These conditions include further government relief measures, moderation in the intensity of competition, and VIL's execution. Vodafone Idea Ltd.'s March quarter results are expected later today.
According to Kotak, Vodafone Idea's most recent fundraising guarantees the medium-term survival of the 3+1 market structure. Vodafone Idea's expected lack of simple customer increases means that rival telecom carriers may be more interested in raising tariffs to generate enough returns rather than snatching up land.
In addition to its anticipated 20% price rise in June 2024 following the general elections, the local brokerage is factoring in a 15% tariff hike in December 2025 compared to a 10% jump earlier.
"We reinstate Vodafone Idea at SELL with Rs 10 fair value, as we await signs of market share stabilization and more clarity on potential GoI relief measures/dilution before turning more constructive," Kotak said.
"Our scenario analysis indicates a high risk-reward skew for Vi (bull-case FV: Rs 23; bear case Rs 7). However, long-term revival still hinges on government's relief measures and moderation in competitive intensity," Kotak added. "Our base case does not include AGR dues waiver; however, a potential waiver (Rs 35,000 crore) could drive Rs 5 per share (or 52 per cent) upside to its fair value."
Although Reliance Jio's involvement in the industry-wide pricing rise is still up for debate, Kotak stated that given its bigger 5G investments, future planned JPL IPO, and continued moderation in RoCEs and FCF, it expects the RIL affiliate to be a more willing player in industry-wide attempts to boost tariffs. It stated that although VIL's recent fundraising and anticipated rate increases could boost the company's prospects in the medium run, it still anticipates a significant cash shortage for the telecom provider.
The government's continued relief initiatives are still necessary for Vodafone Idea's long-term survival. Kotak stated that additional reform measures, such as an extension of the moratorium, a partial remission of the AGR dues, and/or the equity conversion of Vi's, might be implemented in light of GoI's objective to preserve a 3+1 market design in the Indian telecom sector.
"We think Vi needs a lowering in competition intensity in addition to GoI alleviation. Our FV for Vodafone Idea might increase by Rs 3 per share, or 28%, if there was a more drastic rate hike of Rs 10 per month. Additionally, we still factor in a 3% decline in Vi's subscriber market share over FY2024–27E, and better execution to prevent subscriber losses might boost investor confidence and spur additional upsides," the statement stated.
