What's Driving Vodafone Idea Stock Rally? It's Not Business Fundamentals

Shares of Vodafone Idea Ltd. have doubled in the past six months even as its debt obligations have ballooned with no funding in sight. While the telecom operator's ability to continue as a going concern business at risk, the only thing driving its stock is hope.

The shares have gained 107% in the past six months and 24% in the past one month. That compares with Bharti Airtel Ltd.'s that has gained 17.27% in the last six months and has largely remained flat in the last 30 days.

The company stock performance almost disregards concerns about its total debt is more than Rs 2.12 lakh crore as of Sept. 30, and lack of support from U.K.-based promoter Vodafone Plc., which has no hope of salvaging its Indian joint venture. But optimism among largely retail and high-net-worth shareholders is driven by government ownership and hope of funding by existing investors, and a the tax refund that is likely to receive soon.

Vodafone Idea will be able to conclude discussions with equity investors in the October–December quarter, Akshaya Moondra, chief executive officer, said earlier. Based on this equity funding, the banks “will process the request for bank funding and process their internal approval”.

Kumar Mangalam Birla, chairman at Aditya Birla Group, said at the 7th India Mobile Congress that Vodafone Idea will begin investing in rolling out the 5G network and promoting 4G in the "coming quarters". The company also announced in August that a promoter group has promised to infuse Rs 2,000 crore, if required.

While Vodafone Group owns 18.1%, the Aditya Birla Group holds 32.3% stake. The Indian government is the carrier's largest shareholder at 33% holding, which it picked after converting interest dues of Rs 16,133 crore, valuing the company at Rs 48,887 crore.

Government buying stake in Vodafone Idea “reassures people that it's not going to die in a hurry”, said Mahesh Uppal, head of Com First India, a consulting company specialising in regulatory issues surrounding telecom and the internet.

“The government is the largest equity holder, and therefore, for optical reasons, it would not like the company to pack up,” he said.

However, on a closer look, that comfort may be flawed.

About 90% of the company’s debt is owed to the government as part of its deferred payment liabilities towards spectrum and dues arising from the AGR judgement.

While the government has said that it will prevent telecom industry become a duopoly, it is unclear if it is willing to convert more of Vodafone Idea's debt into equity, in case the company defaults.

Investors may be assuming that if Vodafone Idea defaults, the government may convert those dues into equity as well.

However, the dilution of equity if the government decides to convert the principal would be too high, a telecom analyst said on the condition of anonymity as he is not authorised to talk to the media. Such a conversion would set a bad precedent for other corporations, the analyst said.

The belief of a turnaround story in a stock also plays a role. There are multiple mid-cap stocks even with weaker fundamentals that have rallied. Nifty Mid Cap 50 has gained 30.21% in last six months and the Small Cap has risen 41% in the same period.

That may have partly driven the rally in Vodafone Idea's stock. More so as the double-digit share price would have generated interest among retail investors.

Still, some analysts see company’s troubles as “financial”. The company’s services are “fairly decent,” Rajashree Murkute, head-infrastructure ratings at CARE Ratings, said. “What it's lacking is financial wherewithal."

"Once that (funding) comes through, perhaps things may not be too difficult, but it's already lost a lot of time at this point of time,” she said.

However, Vodafone Idea has already missed the bus on 5G. Reliance Jio Infocomm Ltd. and Bharti Airtel may already have a hold of customers by the time Vodafone Idea’s new funding comes in and the 5G investment is complete.

Vodafone Idea Ltd.'s net subscriber churn has started stabilising after it lost 40 lakh at its peak in September 2022. The carrier has cumulatively lost over 5.7 crore wireless subscribers since January 2021.

The 5G delay could make acquiring customers from other networks even more difficult for the company.