Why Vodafone Idea shares lost over 25% of its value on Monday

Mumbai: Shares of Vodafone Idea Ltd slumped 26% to below Rs7 per share on Monday, after the company reported weak performance for the June quarter. The 4% sequential fall in revenues came as a big negative surprise, as analysts were expecting flat revenues compared to the March quarter.

Introduction of minimum recharge plans for pre-paid customers was expected to help the company arrest the decline in revenue. But as it turns out, customers are loath to continue with the new recharge cycles. Further, with competition persisting with low tariffs, the reset to lower priced post-paid plans continues, hurting revenues.

It is worrying that the company continues to lose subscribers at a brisk pace. It lost 14 million more subscribers last quarter (from the March quarter), taking the losses n the past year to about 115 million subscribers.

“Management highlighted that the revenue dip was led by continued down-trading of high ARPU (average revenue per user) subscribers and low ARPU subscribers not recharging in 1QFY20 despite having recharged in 4Q19. We estimate a majority of the decline to be led by down-trading. Minimum recharge had already led to exit of around 90 million and cannot explain for most of the decline," Jefferies India Pvt Ltd said in a note.

Jefferies fears Vodafone Idea may continue to lose subscribers. The company has been lagging peers Bharti Airtel Ltd and Reliance Jio in capital expenditure and in upgrading its entire network to 4G technology. The 4G coverage improved to 68.6% last quarter. But the slow progress in network expansion, reflected in high single-digit growth in data volume, is a drawback. “Capital expenditure in the quarter stood at just ₹2,840 crore, lower than even 4Q19 ( ₹3,200 crore). Despite having lower 4G coverage and lower data capacity, VodaIdea capex has been much lower than peers and even its own guidance ( ₹16,000 crore+ in FY20)," Jefferies added.

The company continues to extract merger benefits. Thanks to synergies, the company lowered its operating expenses by ₹1,480 crore in the last quarter. On an annualised basis, this amounts to 70% of the targeted operating expenses (opex) synergy benefits, up from 60% in the March quarter. “We are therefore well on track to realize our full opex synergy targets by Q1FY21," the company said in a statement.

But revenue deceleration and loss in subscriber base mean synergy benefits are hardly helping. Its earnings before interest, tax, depreciation and amortization fell 22% on an adjusted basis compared to the March quarter. As a result, cash burn at Vodafone, after accounting for interest payments and capex, continues at alarming levels.