CLSA Suggests How Vodafone Idea Can Boost Its Business

Vodafone Idea Ltd. could strengthen its financials in the face of a bruising tariff war if India’s largest telecom operator chooses to focus on select regional markets it dominates, according to CLSA.

A strategic shift from being a pan-India carrier to one with regional focus will boost earnings before interest, tax, depreciation and amortisation by 20 percent and even lower its spectrum debt by 25 percent, CLSA said in a note.

Rock-bottom pricing unleashed by Mukesh Ambani’s Reliance Jio Infocomm Ltd. triggered a tariff war and consolidation in the world’s second-largest telecom market, driving the merger between Vodafone India Ltd. and Idea Cellular Ltd. The two, now called Vodafone Idea, have together lost 10 percentage points in market share and their combined gross-debt-to-Ebitda ratio has surged 30 times to a record since Reliance Jio’s launch.

The company announced a fund infusion of Rs 25,000 crore (97 percent of its market capitalisation) through a rights issue to lower its leverage. But CLSA sees this as a short-term measure. Fundraising by Vodafone Idea will be adequate only for two years, according to the brokerage, and its gearing or leverage will still be out of control over financial years 2019-20 to 2021-22.

Multiple other brokerages, including HDFC Securities, Edelweiss and Motilal Oswal, also said that the fund infusion will support operations for six-eight quarters.

What CLSA Suggests

According to CLSA, the company should focus on the top 10 circles that contributed nearly 75 percent to its total adjusted gross revenue in the quarter ended December. Doing so would not only boost Ebitda by a fifth but would also lower its spectrum debt by close to Rs 30,200 crore.

Vodafone Idea had suggested that it will focus its investments more on profitable areas but would continue to remain a pan-India player.

CLSA suggests that the company should shut operations in 12 circles. While there's limited clarity on whether the telecom companies can selectively shut operations and surrender spectrum, but if allowed this could help Vodafone Idea bring leverage under control, the brokerage said.

The Challenge

Mahesh Uppal, a telecom expert, said the strategy suggested by CLSA looks feasible but it’s unlikely that a company like Vodafone Idea would look to downsize its operations.

But withdrawing from circles where Vodafone Idea isn't dominant will not ease the challenge if faces from rivals in its stronger markets, especially Reliance Jio.

This approach of being a regional player will be very difficult to sustain, according to Sanjay Kapoor, former chief executive officer of Bharti Airtel Ltd. Exit from dominant circles won’t stop rivals from poaching Vodafone Idea’s users, he said. Threat of competition in their own markets stops operators from directly challenging rivals in the stronger circles, he said. If a carrier withdraws from the dominant circle of a rival, it will face relentless competition, Kapoor said.

Vodafone Idea is the second least preferred telecom stock in the world with as many as 13 sell ratings, according to Bloomberg data, after 19 ‘Sell’ calls for Malaysia’s Maxis Berhad. The consensus 12-month target stands at Rs 36, suggesting a return potential of over 20 percent.