VIL's capital-raise unlikely to plug market share erosion: Goldman Sachs

Vodafone Idea's recent capital-raise while incrementally positive, may not be adequate to stop the telco's market share erosion, according to a note by Goldman Sachs.

The brokerage has, in fact, anticipated another 300 bps (basis point) share loss for the company over the next 3-4 years, citing the direct correlation between capital expenditure and revenue market share, and given its own expectation of peers spending at least 50 per cent higher capex versus Vodafone Idea.

One basis point is equal to 1/100th of a per cent.

"Vodafone Idea's recent capital raise, while incrementally positive, is unlikely to be adequate to stop the company's market share erosion in our view," it said.

Additionally, it said, Vodafone Idea has large Adjusted Gross Revenue (AGR)/spectrum-related payments starting in FY26.

"While the government has the option of converting some dues into equity, we estimate ARPUs would have to rise by Rs 200-270 (120-150 per cent under different scenarios) versus December 24 estimates levels for Vodafone Idea to be sustainably free cash flow neutral, a low probability in the medium-term in our view," as per Goldman Sachs.

It expects Vodafone Idea's net-debt-to-EBITDA (or leverage ratio) to remain elevated by March 2025 (despite the capital raise and tariff hike), and believes that the balance sheet will remain stretched even after potential government conversion of near-term dues into equity.

Outlining the best-case scenario, it said "where we assume 65 per cent lower AGR dues, consistent tariff increases and no near-term government repayments (upside risks), we see an implied value per share of Rs 19 for Vodafone Idea, implying 26 per cent upside from current levels, versus 83 per cent downside in our base case."

It is pertinent to mention here that Vodafone Idea reported narrowing of losses for the just-ended June quarter to Rs 6,432.1 crore, mainly on the back of 4G subscriber additions.

Giving its Q1 scorecard, the telecom firm said it is in the midst of expanding 4G coverage and capacity and launching 5G services post the recent fundraising. VIL's losses stood at Rs 7,840 crore in Q1 FY24 and Rs 7,674.6 crore in Q4 FY24.

The revenue dipped 1.3 per cent year-on-year to Rs 10,508.3 crore in the fiscal's first quarter ended June 2024. The company's ARPU (average revenue per user) for the quarter stood at Rs 146.

During this calendar year, the company had raised equity funding of about Rs 24,000 crore, including Rs 18,000 crore via an FPO in April, and Rs 2,080 crore via preferential issuance to ABG (promoter) entity in May.

The company, in its earnings release last month said the equity fundraise bolsters its capex roll-out for building a top quality 4G and 5G network to contribute towards India's digital transformation.

Post these issuances, the promoters' shareholding stands at 37.2 per cent and shareholding of the government is at 23.1 per cent.