'83% downside': Goldman Sachs turns bearish on Vi amid unclear market share recovery

Shares of Vodafone Idea (Vi) plunged as much as 14.4% to ₹12.91 in intraday trade on Friday after foreign brokerage firm Goldman Sachs retained ‘Sell’ call on the telecom stock, saying that the path to free cash flow (FCF) break-even and market share recovery is unclear. The brokerage expects a potential downside of 83% on the stock with a target price of ₹2.5 apiece amid concerns that recent capital raise by the company is unlikely to be sufficient enough to stop its market share erosion.

Vi recently raised ₹20,100 crore ($2.4 bn) in equity (through a combination of a follow-on public offer and capital infusion from promoters; excluding vendors). In addition, the company says it intends to raise another ₹25,000 crore in debt ($3 bn), though it didn’t specify a timeline.

The brokerage says Vi shares currently trade at an almost 100% premium to Bharti and Jio, and it sees limited reason for this premium to exist, citing weaker growth, margin returns and balance sheet profile vs peers.

Goldman predicts the telco to lose another 300 bps in market share over the next 3-4 years, amid expectation of peers spending at least 50% higher capex as compared to the cash-strapped company. Vi, India’s third-largest telco with 17% revenue market share, has consistently underperformed peers- Bharti Airtel and Reliance Jio, losing about 500 basis points of revenue market share over the last 3 years.

The company projected a capex of $6-6.6 bn over the next three years, down 50% as compared to $9-10 bn capex each by Bharti and Jio over the same period. “We believe there is a direct correlation between capex market share and revenue market share of telcos, with capex reflecting in market share with some lag,” as per the report.

 “Vodafone Idea’s net-debt-to-EBITDA will remain elevated at 19x by Mar ‘25 (despite the capital raise and tariff increase), and we continue to expect its balance sheet to remain stretched even after potential government conversion of near-term dues into equity,” the report adds.

Vodafone Idea, a joint venture between Vodafone and the Aditya Birla Group, has gross debt of ₹2.1 lakh crore ($26 billion), of which only about $600 mn is owed to banks and financial institutions, with the remainder payable to the government of India towards spectrum ($17.2 bn) and AGR (adjusted gross revenue) dues ($8.5 bn). These government dues are currently under moratorium until October ‘25, after which the telcom operator will have substantial payment obligations. The company’s recent filings show that its repayment obligation would be $3.3 bn in FY26, rising to $5 bn in FY27 (excluding dues not under moratorium).

Taking into account repayments such as interest expense on new debt, minimum spectrum dues, and other payables, the brokerage estimates Vodafone Idea to have a maximum capex potential of ₹62,600 crore ($7.5 bn) by Mar ’25.

In best case scenario, assuming 65% lower AGR dues, consistent tariff increases, and no near-term government repayments, the agency pegged an implied value per share of ₹19, implying a 26% upside from current levels. This scenario assumes additions of subscribers starting FY27; continued increases in tariffs until FY30; and conversion of spectrum and AGR dues payable until FY28 into equity by the government of India, as indicated by Vodafone Idea in its Q4 FY24 earnings call. 

(DISCLAIMER: The views and opinions expressed by investment experts on fortuneindia.com are either their own or of their organisations, but not necessarily that of fortuneindia.com and its editorial team. Readers are advised to consult certified experts before taking investment decisions.)