Back To 2018 Levels? Jefferies Initiates 'Buy' On Vodafone Idea Stock, Sees 29% Upside

Jefferies expects a possible turnaround for Vodafone Idea, with the brokerage expecting the telecom operator's shares to climb back to levels last seen in 2018. The bullish call comes as a strengthening subscriber base that is expected to drive growth.

In its recent note, Jefferies has initiated at a 'buy' call on the stock at a target price of Rs 20, marking 28.8% upside from its Wednesday's closing price of Rs 15.52. Vodafone shares last traded in the target price range in 2018.

According to the brokerage, VIL's network investments are helping to retain more customers and boost  ingross subscriber additions is expected to drive a turnaround in subscriber additions from FY28. This is likely to improve the translation of tariff hikes into revenue growth for the telecom operator. Additionally, its lower share data subscribers offers higher scope for subscriber premiumization. 

Calling Vodafone Idea, "a high-beta turnaround story", Jefferies estimates around 11% revenue growth over FY26-29, led by subscriber stabilization, premiumization and tariff-led ARPU growth, which will help to sustain revenue market share.

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From FY26 to FY29, the brokerage expects Vodafone Idea to post a 840bps expansion in cash EBITDA margins to 29% primarily driven by operating leverage. The assumption indicates Jefferies expects Vodafone Idea's EBITDA margin to be around 50% in the period under consideration, lower than the 60% margins typically posted by other telecom companies as Vodafone Idea will be spending heavily on network expansion. The margins could rise to 60% once network rollouts normalise, liklely by FY30. This should enable the firm to deliver 25%EBITDA over FY26-31.

Vodafone Idea's operating cashflows is expected to grow at a steady pace, while its cash outflows will rise sharply to Rs 400 billion annually during FY29-34 , resulting in a temporary cashflow mismatch over this period, Jefferies noted.

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The debt raise  of Rs 250 billion will be sufficient for FY27-29, the company will require Rs160 billion fresh equity infusion in FY30 which will also trigger conversion of spectrum liabilities worth Rs153 billion to equity by the government. This would be enough to cover the cashflow shortfall over FY30-34. Provided that Vodafone Idea has raised equity of Rs 447billion since 2019, Jefferies believes raising Rs160 billion may not be difficult amid improving operating cashflows and continued govt. support.

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