Vodafone Idea FPO risk-reward favourable, say analysts — Should you subscribe to the ₹18,000 crore offer?

Vodafone Idea FPO risk-reward favourable, say analysts — Should you subscribe to the ₹18,000 crore offer?

India’s largest follow-on-public offer (FPO) of telecom service provider Vodafone Idea Ltd. will open for subscription on April 18, and close on April 22. The company intends to raise up to ₹18,000 crore through the FPO.

Analysts believe that a strong anchor investor participation bodes well for the offer.

Vodafone Idea’s secured ₹5,400 crore from 74 anchor investors, which was the third-largest anchor book in India and was fully subscribed on Tuesday. Foreign institutions including GQG Partners, The Master Trust Bank of Japan, UBS, Norges, Citigroup Global Markets, Morgan Stanley Investment Management along with domestic mutual fund investors including HDFC, Quant and Motilal Oswal subscribed to the company’s anchor book.

What analysts recommend

According to analysts, the risk-to-reward ratio for investing in the debt-ridden telecom major at the FPO price is favourable. Vodafone Idea has fixed the price band for its FPO between ₹10 to ₹11 per share.

“The risk-to-reward ratio looks good for the FPO and the anchor list has some strong institutional names like GQG and domestic funds,” said Abhilash Pagaria of Nuvama Alternative & Quantitative Research.

From a conservative perspective, Pagaria said that an up move of 30% to 35% at these prices is expected in the coming months. “This can be a short, 3-4 months kind of trade opportunity and it can be evaluated later whether long term prospects make sense.”

Further, the analyst said that if the stock price moves up as anticipated, it could be included in the MSCI index in the August-November review, leading to passive flows of about $ 150 million.

Hemang Jani of Finazenn believes the FPO is a good opportunity to get attractive pricing for the brand name and customer base that Vodafone has. He advised retail investors to either choose to sell on listing day or hold the stock for six to 12 months and benefit from a possible upmove in the stock to ₹16 per share.

However, Jani said that the company’s debt concerns may cap upside for the stock.

“While the upside may not be significant, due to the huge debt and network quality issues, 15-16 is the best target for the stock in the near term,” he added.

According to Prashanth Tapse of Mehta Equities, Vodafone Idea is facing financial strain to maintain its balance sheet and eventually operate in a competitive market because of its debt and unpaid adjusted gross revenue (AGR) to the government.

Considering the continuous loss of money and subscribers, it is not advisable to take part in the offer, Tapse said.

Shivani Nyati, Head of Wealth at Swastika Investmart recommended investors to consider that Vodafone Idea’s path to a near-term revival seems uncertain.

According to Manish Chowdhury, head of research at StoxBox, investors with a moderate to high-risk appetite could subscribe to the FPO and play it from a turnaround story perspective. Chowdhury said that once the proceeds of the FPO are realised, it will take a few quarters to reflect in the company’s performance.

The FPO is entirely a fresh issue of shares. Half of the FPO size has been reserved for qualified institutional buyers, 15% for non-institutional investors and the rest 35% for retail investors.

Vodafone Idea FPO gets govt support

Vodafone Idea’s ₹18,000 crore FPO has received support from the government, which is the largest shareholder in the telecom operator.

In an exclusive interaction with CNBC-TV18, Finance Secretary TV Somanathan said that preserving competition with multiple operators in the market is a major policy goal of the government.

He said that the government is happy to see the capital investment plans of Vodafone Idea.

“India’s economic growth needs a thriving telecoms sector. We need multiple operators to preserve competition and protect consumers,” the Finance Secretary said.

He highlighted the government’s aim to preserve competition within the sector. “Preserving competition is a major policy goal of the government & is reflected in the September 2021 telecom package and the large cap infusion to BSNL,” Somanathan added.

The government owns a 32.19% stake in Vodafone Idea based on the March quarter shareholding pattern on the BSE.

The FPO is part of the company’s ₹20,000 fund raising plan via equity. Previously, VIL had raised ₹2,075 crore through the issue of shares on a preferential basis to Oriana Investments, which is one of the promoter group entities.

On Tuesday, shares of Vodafone Idea settled 1.90% lower at ₹12.90 apiece on the NSE. The stock has fallen 24% so far in 2024.