Vodafone Idea’s belt-tightening is helpful, but far from good enough

When expectations aren’t running very high, room for disappointment is small. Analysts were already expecting Vodafone Idea Ltd to report a massive loss of around ₹5,000 crore for the December quarter, and it turns out that they were prescient. The company reported a loss of ₹5,004.6 crore.

In fact, thanks to operating cost synergies and some belt-tightening, Ebitda (earnings before interest, tax, depreciation and amortization) rose 16.3% sequentially to ₹1,137 crore. Ebitda margin widened by 150 basis points from the September quarter. This should come as a relief to investors, considering that margins were frightfully low at 8.1% in Q2.

But the relief is only marginal. Note that margins of Bharti Airtel Ltd’s India wireless business are nearly double those levels. And as the chart alongside shows, Vodafone Idea’s profit levels are still much lower than peers, notwithstanding the improvement last quarter. To be sure, the majority of the synergy benefits are yet to play out, and things will settle down only by FY21.

However, investors are worried that the company will lose revenue market share to Reliance Jio Infocomm Ltd and Bharti Airtel, which continue to spend far higher amounts in enhancing their networks. So far this fiscal year, Jio and Airtel have spent 6.58 times and 2.37 times the amount, respectively, that Vodafone Idea incurred as capex.

In the December quarter, Vodafone Idea’s capex fell to as low as ₹1,169 crore, which was less than a tenth of Reliance Jio’s ₹14,000 crore spend. While the company said capex numbers will be higher in Q4, analysts are worried that balance- sheet constraints will limit growth.

Despite the low capex, the company continued to burn cash in the last quarter. As a result, net liabilities rose to ₹1.148 trillion, which works out to over 25 times annualized Ebitda. Clearly, there isn’t much room for large investments.

Apart from the improvement in margins, another positive in the December quarter results is that Vodafone Idea’s revenue fell only 2.2% sequentially, which is much better compared to the 7.1% drop in Q2. “We experienced growth in daily revenue on a month-on-month basis during December 2018, which continued into January 2019,” the company said in an investor update.

An analyst at an institutional brokerage firm said that some of the improvement on the revenue front appears to be on account of the company’s enterprise business, although even after adjusting for that, the drop in revenues has moderated to about 4%. While this is clearly a positive, things can improve materially only when Reliance Jio signs up for a plan to increase tariffs. At current tariff levels, all telcos are burning cash, and Vodafone Idea’s high leverage makes it the most precariously placed.

A large part of these worries are reflected in the company’s shares, which have fallen about 65% in the past one year.

In the backdrop of low expectations, the sequential improvement in performance may well prop up the stock. But unless Vodafone Idea finds a way to counter its competitor’s large investments, it will continue to lag behind them in terms of profits and investor interest.