Almost 100% potential upside! Citi says stars finally aligning for Vodafone Idea; sees it hitting ₹25 in bull case

Citi Research sees potential for nearly 100% upside in Vodafone Idea.

The stars are finally aligning for Vodafone Idea, believes global brokerage house Citi Research. After an almost 87 percent jump in Vodafone Idea in the last one year, the brokerage expects another almost 100 percent potential upside in the telecom stock in its bull case scenario.

In this scenario, it has a target price of ₹25 for the stock, indicating an upside of 97 percent from its current market price of ₹12.7. Key assumptions behind its bull case TP of ₹25 are – 1) Higher tariff hikes (20 percent each), taking FY28E ARPU (average revenue per user) to ₹250; 2) Higher subscriber additions; 3) Decline in AGR (adjusted gross revenue) debt by over 50 percent ( ₹35,000 crore); and 4) FY28E net debt/EBITDA ratio of 5x.

“The stars are finally aligning for VI following completion of its long-delayed equity raise. The govt’s backing, which we view as tantamount to doing what it takes to ensure that the 3-player industry structure stays intact, has been instrumental in setting up the company for this turnaround and providing it a “fresh lease of life”, as KM Birla proclaimed. We, too, are enthused by recent developments, with the ₹20,000 crore equity raise (over ₹25,000 crore planned debt raise) enabling VI to accelerate network investments and narrow the gap with peers on 4G coverage and 5G rollouts,” said Citi.

Read here: BofA upgrades Vodafone Idea rating to ‘Neutral’ on tariff hike leverage

However, it cautioned that a lot still needs to fall into place, starting with (multiple) tariff hikes & arresting the subscriber decline, and ideally culminating in (some form of) debt relief, driving its Neutral/High-Risk rating for the stock.

The brokerage incorporated the equity raise and increased its FY25-26E EBITDA by 5-18 percent. Meanwhile, its base case target price for the stock is ₹15, implying an over 18 percent potential upside.

Key assumptions for the base case scenario include 1) an ARPU increase of around 60 percent over four years (from ₹143 to around ₹230 over FY24-28E), driven by approximately 15 percent 4G tariff hikes each in 2QFY25E and 3QFY26E; 2) Revenue market share expected to stay stable at around 16 percent; 3) The government exercising the option to part-convert its dues into equity after the moratorium ends (total gov’t dues amount to ₹29,100 crore in H2FY26 and ₹43,000 crore/yr from FY27); 4) No AGR relief from the pending curative petition in the Supreme Court; 5) A FY28E net debt/EBITDA ratio of around 7x; 6) The target EV/EBITDA set at 11x, aligning with Bharti’s multiple, but based on FY28E (discounted back) to account for operational recovery, with a projected 4-year EBITDA CAGR of 21 percent from a low base.

Read here: Vodafone Idea in talks with PSBs to avail loans worth ₹15,000 crore: Report

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As per the brokerage, the completion of the long-delayed fund raise firmly puts to rest existential concerns and puts VI on the recovery path by enabling it to reinvest in the network and catch up with peers.

Citi believes that the risk/reward is, therefore, not yet compelling and it prefers staying on the sidelines for now, but will closely monitor developments. It views the stock as a “show me” story, with returns contingent on not just industry dynamics and continued government support but also the company’s execution.

Furthermore, Citi noted that the management is optimistic of the industry taking tariff hikes sooner rather than later after the June 2024 election results, which it believes are imperative for the industry given significant network & spectrum spends. Besides tariff hikes, ARPUs should additionally benefit from upgrading 2G subscribers to 4G, given that 42 percent of VI’s subscribers are not yet on 4G (vs 29 percent for Bharti).

Read here: Vi loses 680,000 subscribers in March, its fewest in seven months

Management also highlighted that VI’s share in gross subscriber additions (26 percent) is higher than its current customer market share (19 percent), which makes it confident of being able to reverse net subscriber losses once 4G coverage expands (and churn therefore reduces), added Citi.

Read here: Prabhudas Lilladher advises long-term SIPs in Aditya Birla Group stocks

Investment strategy

The brokerage has rated Vodafone Idea as Neutral/High risk.

“The company’s balance sheet leverage has remained uncomfortably high and had worsened following the adverse Supreme Court verdict on the AGR issue in Oct’19. However, gov’t moves including a four-year moratorium on spectrum & AGR payments have provided material cash flow relief, while the completion of the long-delayed fundraise ensures sufficient capital for the company to reinvest in the network and reduce the gap vis-à-vis its two peers on 4G coverage & 5G rollouts. Gov’t support to ensure that the 3-player industry structure stays intact has been unequivocally evident, though continued dilution remains a key uncertainty. We, therefore, remain on the sidelines,” it explained.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.