What happens next with Vodafone Idea?

4 years back, Idea cellular’s market capitalization was Rs. 3.85 Lakh Crore. Post merger with Vodafone it had the highest subscriber base (by far). Today, the combined entity’s market capitalization of Vodafone Idea is Rs. 14 thousand crore. This is staggering!! One of the most dramati falls has largely gone unnoticed by the broader market. Lets take a look…

Vodafone-Idea (“Voda-Idea” or the “Company”) merger on 31 August 2018 was considered as one of the biggest deal in the struggling telecom sector. The sector was and is still facing aggressive tariff war, declining profitability and high debt primarily due to the entry of Reliance Jio in September 2016.

Voda-Idea Merger – To fight the disruption brought about by Jio, Idea Cellular and Vodafone India announced their merger on 20th March 2017 and completed their merger on 31st August 2018 and emerged as the largest telecom operator with over 400 million subscribers.

Share Price Performance

Looking at the stock price performance, it appears that Voda-Idea’s big merger plan and massive capital infusion of Rs 25,000 Cr. (right issue in April 2019), has failed to boost investors’ confidence in the Company.

Failure of Vodafone Idea Merger Plan and Fund Infusion

In 2017, Vodafone and Aditya Birla Group—valued the Combined Company at nearly Rs. 92,000 Cr., or Rs. 130 per share, when the merger was announced. In 2019, the same valuation dropped to Rs. 12.5 per share when the Company announced its Rs. 25,000 Cr. right issue.

Since the merger, the combined entity (Vodafone-Idea) has gone through a massive bloodbath on stock exchanges. In the last one year alone, the stock price of the Company had lost about 84%, from Rs. 31.45 to Rs. 5.10. On 5th July alone, Vodafone-Idea lost 30% after another weak quarter of financial and subscriber losses.

Poor Financials

VODAFONE-IDEA’S CURRENT MARKET CAP IS LESS THAN ITS TRAILING TWELVE MONTHS NET LOSSES.

Vodafone-Idea is in losses for the last 3 consecutive  years. In FY 2019, the Company reported a net loss of Rs 14,603.90 Cr., signifying the financial stress which the Company is facing.  At Current price of Rs. 5.05 (5th Sept, 2019), the market cap of Vodafone Idea is Rs 14,500 Cr., which is lower than the net losses it piled up in the last four quarters (Rs.19,734.10 Cr.)

In Rs. Cr.

Jun-18

Sep-18

Dec-18

Mar-19

Jun-19

Revenue

5,889.20

7,663.50

11,764.80

11,775.00

11,269.90

Net Profit/ Loss

256.50

(4,973.80)

(5,004.60)

(4,881.90)

(4,873.90)

Comparative Financials – June 2019

In Rs. Cr.

Reliance Jio

Bharti Airtel

Voda-Idea

Revenue

11,679

20,737.90

11,269.9

Net Loss/Profit

Profit – 891

Loss – 2,392.20

Loss – 4,874

Huge Pile of Debt

Vodafone Idea is now the most indebted company in the Aditya Birla group. The Company accounted for nearly 40% of all group debt at the end of FY19. In June 2019, Vodafone Idea’s debt reached Rs. 120,440 Cr.

In Rs. Cr.

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Vodafone-Idea

Debt

16,810.48

37,549.62

51,672.54

56,962.49

108,523.60

Equity

23,027.31

23,550.49

24,732.24

27,262.46

59,634.80

Debt/Equity

0.73

1.59

2.09

2.09

1.82

Bharti Airtel

Debt

69,929.90

100,452.60

107,287.70

111,333.50

125,428.30

Equity

39,777.00

66,769.30

67,456.30

69,534.40

71,422.20

Debt/Equity

1.76

1.50

1.59

1.60

1.76

Drop in Customer Base

Vodafone Idea lost over 14.1 million subscribers from April to June 2019 due to intense competition. During the same period, Jio added 8.3 million new subscribers. If the Company continues to lose subscribers, then its revenue growth would remain weak.

Subscriber Base  (In millions)

June-18

Sept-18

Dec-18

Mar-19

June-19

Voda-Idea

435.4

422.3

387.2

334.1

320.0

Bharti Airtel

363.2

351.5

303.3

302.2

301.5

Reliance Jio

215.3

252.3

280.1

306.7

331.3

Average Revenue Per User (ARPU) now stands at Rs.108, up 3.8% quarter-on-quarter vs Rs.104 in Q4FY19. This is less than the ARPU of both Bharti Airtel (Rs. 129) and Reliance Jio (Rs. 122).

ARPU (In Rs.)

June-18

Sept-18

Dec-18

Mar-19

June-19

Voda-Idea

92

88

89

104

108

Bharti Airtel

105

100

104

123

129

Reliance Jio

134.5

131.7

130

126.2

122

Change in Management

The Company is not only facing financial troubles but also cultural clashes between the employees of the two merged entities. On 19th August, 2019, Balesh Sharma exited the Company– he was appointed as the CEO of the merged entity in August 2018. The Stock reacted negative to this news and plunged 9% in a single day.

VIEW: FUTURE TRAJECTORY FOR THE STOCK

I believe that the stock will continue to have a downward spiral. In case of an acquisition by another telecom operatior like Jio however, a fortune could be made in this counter, specially given that this stock is very liquid in the F&O market.

Jio’s entry into the market dented the financial metrics for both Bharti Airtel and Vodafone Idea. The situation has worsened, so much so, that both Airtel and Voda-Idea stock price has been falling continuously. In April-June quarter, Jio snatched the top position in terms of number of active subscribers from Vodafone Idea.  

5G Spectrum Game – If the government allows the 5G spectrum auction this year, the financial liabilities of Vodafone-Idea will further increase. Even in an interview, Vodafone Idea CTO shared that “the Company is not in favour of 5G Spectrum before 2020”.