Vodafone Idea rating – Sell: Key variables showed an improving print in Q4

Data usage grew 8.2% q-o-q to 4,489 bn MB as network quality improved.

Vodafone Idea’s (VIL’s) Q4FY21 cash Ebitda at Rs 22 bn benefited from one-off gains in network cost of Rs 4.5 bn; adjusted cash Ebitda came in below our estimate despite cost-saving efforts. Though VIL has seen marginal improvement in 4G subscriber (sub) addition and lower total subs loss, it is too little to make any difference, in our view. We see liabilities coming up for payment soon and VIL may have cashflow mismatch. The efforts to raise funds have also not yielded any outcome yet. Relief from government on spectrum payment, and reduction in AGR liability on SC accepting reconciliation are other hopes. We have cut our Ebitda estimates by 11%/14% for FY22e/FY23e, but maintained our target price of Rs 5 as we increase the Ebitda multiple to 13.3x (from 10.5x earlier). SELL.

Key variables showed improving prints: VIL had sub loss of just 2 mn – same as in the previous quarter. Company has added 4.2 mn 4G subs (it has been improving in past few quarters). Gross sub addition has improved to 22 mn (vs 13.5 mn in past 12 months), which is helping reduce sub loss. Data usage grew 8.2% q-o-q to 4,489 bn MB as network quality improved.

Adjusted for IUC impact, revenues down 2.2% q-o-q to Rs 96 bn. VIL’s mobile revenues were stable q-o-q if adjusted for 2 days less during the quarter, and IUC impact. This was despite loss of 2 mn subs due to rise in 4G subs, which should have helped organic ARPU growth. On reported basis, ARPU was down 11.6% q-o-q to Rs 107. Postpaid sub base has grown marginally by 0.1mn to 20.9 mn, which should have also helped.

Cash Ebitda (adjusted for Ind-AS 116) at Rs 22 bn. Ebitda at Rs 44 bn was up 2.9% q-o-q due to one-off gains in cost (network and IT) of Rs 4.5 bn; adjusted Ebitda dipped 7.6% q-o-q despite strong efficiency in cost savings. Adjusted for one-offs, network cost was down 1.1% q-o-q, employee cost fell 13% q-o-q while SG&A cost rose 18% q-o-q. Adjusted for Ind-AS 116, Ebitda was at Rs 22 bn (up 3% q-o-q and down 18% q-o-q if we adjust for one-off gains). Ebitda should have been impacted by nil IUC revenue as VIL was net IUC receiver earlier.

Total debt including AGR dues and accrued interest was Rs 1,867 bn. The figure includes deferred spectrum liability of Rs 963 bn, AGR liability of Rs 610 bn, and bank borrowing of Rs 231 bn. The liabilities due for payment in next 12 months are: (i) annual payment (includes interest) towards AGR liability of Rs 80 bn in Mar’22 (this is assuming nil payment for Mar’21 dues, which is yet to be clarified); (ii) bank guarantee of Rs 70 bn coming up for renewal (VIL has to give additional bank guarantee of Rs 10 bn); (iii) annual payment towards spectrum due in Apr’22 – of Rs 82 bn. Company has requested DOT for deferment of some of the payments. We see payment of liabilities coming soon, while fund availability remains a challenge.