Vodafone Idea's Planned Fund Infusion Inadequate For Revival, Say Analysts

Vodafone Idea Ltd.'s planned fundraising is "minuscule" when compared to its debt and may be "inadequate" for its revival, according to analysts.

The carrier's board approved raising up to Rs 4,500 crore from promoters. A total of 338.35 crore equity shares will be issued to the promoters on a preferential basis. The shares will be issued to Vodafone entities—Euro Pacific Securities Ltd. and Prime Metals Ltd.—as well as to the Aditya Birla Group entity Oriana Investments Pte.

The board also approved raising Rs 10,000 crore by way of private placement or qualified institutional placement through issue of equity shares or securities such as global depository receipts, American depository receipts, foreign currency convertible bonds, convertible debentures and warrants.

Shares of Vodafone Idea fell more than 7% but pared some of the losses to trade 5.6% lower as of 12.30 p.m. on Friday.

Here's how analysts view the company's fundraising approval:

Kotak Securities

• Announced fundraise remains miniscule in comparison to Vi's debt.

• The equity issue will lead to a 12% dilution on the current equity base.

• Vodafone Group entities will infuse Rs 3,375 crore from the proceeds of its stake sale in Indus Towers Ltd. and the Aditya Birla Group entity will infuse the remaining Rs 1,125 crore.

• The company needs to continue to raise significant capital to repay existing dues, as its total net debt in the nine months of FY22 stood at Rs 1.97 lakh crore.

• It is yet to be seen if any external strategic investors decide to participate in Vi's upcoming Rs 10,000-crore capital-raise, given the underlying challenges that the company faces.

• Weak operational parameters and significant net debt mean Vi will remain on a challenging path in the coming years, and will lag Bharti Airtel Ltd. and Reliance Jio Infocomm Ltd.

• Rating stays suspended given the lack of value creation and potential large dilution expected from likely equity conversion on the deferment of adjusted gross revenue and spectrum liabilities.

Nomura

• The promoters' infusion, while positive for sentiment and a potential precursor to external fundraising, is not enough for Vi's revival.

• Nearly 43% of the promoter infusion would have to be remitted to Indus Towers to clear Vi's outstanding dues and is unlikely to be available for VIL to plug the gap to peers on network coverage.

• Do not expect any meaningful increase in Vi's capex in FY23F. Such capex increase will require external fundraising or debt recast.

• With just a token investment from promoters and potentially large stake dilution to government of India, the expedited external fundraise could prove challenging.

• Without significant external fundraising, Vi's network investments and 5G rollout would remain constrained, at least in the near term.

• There will be further market share erosion for Vi and market share gains for Bharti Airtel and Reliance Jio.

• Maintain ‘reduce' rating with a target price of Rs 8 (downside of 28%).

Credit Suisse

• Promoters' equity infusion is inadequate whereas infusion from non-promoters remains elusive.

• Only 25% of Rs 4,500 crore equity infusion from promoters, representing Aditya Birla Group's share of Rs 1,125 crore equity infusion, would be available unencumbered to Vi.

• The announcement of Rs 10,000-crore fundraise approval is an enabling resolution to renew earlier approval and is not an indication of fund infusion from third parties, at least on an immediate basis.

• Retains preference for Airtel as it remains a beneficiary of the average revenue per user improvement, improved regulatory environment, and organic market share gains over the medium term.

IIFL

• The equity infusion of Rs 4,500 crore would have a negligible impact on Vi's leverage ratio but may marginally improve the prospects of raising equity from external investors.

• The deleveraging from fundraising would be miniscule and the ability to raise annualised capex rate from the current Rs 4,000 crore would be limited.

• The fundraising efforts could still see challenges amid tough macro conditions.

• Vi needs to invest Rs 20,000 crore on its network in two years to support 20 crore 4G subscribers.

• Significantly higher equity infusion and ARPU improvement are key to improving Vi's competitiveness.

• Maintains ‘reduce' rating with a target price of Rs 10 (downside of 9.7%).