MOFSL: Subscriber Churn as Major Challenge for Vodafone Idea Stock

Motilal Oswal Financial Services (MOFSL) remains optimistic about the ambitious capex initiatives of Vodafone Idea, but reminds that the future of the stock more than anything will depend on how effectively the telecom provider can reduce subscriber churn.

The shares of Vodafone Idea declined 2.12% to ₹10.62 on NSE on Tuesday, despite the launch of an expansive capex plan by the company.

While the Average Revenue Per User (ARPU) of the firm has been steadily growing due to the adoption of 4G services, enhanced data monetization, and bettering its minimum recharge packages, it is not out of the woods as far as churn going up. MOFSL says this is on account of "insufficient network investments that have impacted customer experience and nudged churn up."

Now, Vodafone Idea has rolled out an investment plan for the next three years, involving ₹50,000-55,000 crore. It would include expansion of its 4G network, roll out of 5G, and boosting capacity. According to MOFSL, all this is imperative to the company's trajectory.

It takes into account subscriber churn, which is expected to be down from Q4. Capex roll out to begin in Q3. Also, the company has announced all the details relating to debt funding of ₹5,000 crore which is likely to be firmed up in next 7-8 weeks. Going ahead, Vodafone Idea also likely to witness another tariff hike of around 20% by next year which would enhance both ARPU and earnings.

However, still on the pending stages of execution of these initiatives, MOFSL retains the 'neutral' rating on the stock, with a price target of ₹12, which now raises its upside potential over the last closing to over 11%.

The company has summoned a conference where its talks with government officials concerning the AGR case are in progress, despite Supreme Court dismissal of the curative petition. MOFSL said the entity, Vodafone Idea is working on the report with details about calculation errors and will meet the government soon. The company claims that the top-line management of Vodafone Idea is not dependent on the AGR matter outcome.

Vodafone Idea's CEO Mr Akshaya Moondra said the firm has resumed new talks with the union government for payment of AGR dues. He assured analysts that all the long-term plans of the firm remain "unaffected" by the outcome of its curative petition. The debt funding efforts that are ongoing so far would get complete in the next two months, Moondra said, adding that a techno-economic evaluation has already been done through a third party.

Pushed forward with this was the urgent call by investors and analysts after the Supreme Court rejected the curative petitions filed by telecom operators, including Vodafone Idea, over the ₹1.43 trillion AGR dues.

"While a favorable outcome would have relieved the liability and allowed for faster deleveraging, our long-term strategy and business plans remain in place. The curative petition outcome does not affect or alter our cash flow projections, which are already incorporated into our business plan," Moondra said. The company's strategy did not depend on anything positive coming out of the AGR case, he emphasized.

Vodafone Idea's total debt stands at ₹2.09 trillion at the end of first quarter FY25. Of this, deferred spectrum payment obligations stand at ₹1.39 trillion while AGR liabilities stood at ₹70,320 crore paid to the government. After the moratorium, that is to say, going to expire in October 2025, Vodafone Idea have to pay ₹12,000 crores by the end of March 2026, in addition to annuity payments worth ₹43,000 crores to the government annually from FY27 through FY31.

"The techno-economic evaluation has been presented to all the banks and financial institutions, where they can proceed with their in-house approval process. We expect to complete the funding process in the next 7 to 8 weeks," Moondra said.

While the company has added equity of ₹24,000 crore till date, bank officials are still apprehensive as Vodafone Idea still has multiple payment dues to the government, its vendors, and tower companies. However, the telco remains optimistic as its bank debt dipped to ₹4,800 crore in Q1 from ₹9,200 crore a year earlier.

Vodafone Idea also signed a $3.6 billion (₹30,000 crore) deal with Nokia, Ericsson, and Samsung for the radio equipment to be provided to the proposed expansion of the 4G network, which will reportedly reach from 1.03 billion to 1.2 billion Indians.