Vodafone Idea FPO: The follow-on public offering (FPO) by Vodafone Idea, valued at ₹18,000 crore, is seen by domestic brokerage Kotak Institutional Equities as a positive move, even if it was somewhat delayed. It will likely plug the network coverage gap and boost the company's competitiveness relative to its peers.
As per Vodafone Idea FPO's red herring prospectus (RHP), the company's peers are Bharti Airtel Ltd (with a P/E of 84.37), Bharti Hexacom Ltd (with a P/E of 51.91), and Reliance Jio Infocomm Ltd.
The brokerage also expressed confidence that Vodafone Idea would be able to obtain more bank funding after its bank debt has been significantly reduced.
Also Read: Vodafone Idea to launch ₹18,000 crore FPO at ₹10-11 price band
Throwing light on the FPO plans, the brokerage firm has highlighted three points: while the fund-raise should improve the company's short-term prospects, the brokerage is still worried about potential large stock dilution (on the conversion of GoI dues) and does not believe the company will gain any appreciable market share from competitors. In the worst-case scenario, minority investors would not have much opportunity for considerable upside as the GoI may own an entirely diluted 80%+ stake in Vodanfone Idea.
Vodafone Idea FPO is scheduled to open on Thursday, April 18, and close on Monday, April 22, per a BSE filing on Friday.
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Let's explore in more depth what the brokerage has to say.
In addition to the previous issue of preferential equity to promoters for ₹2,080 crore, Vodafone Idea has announced an FPO for ₹18,000 crore at ₹10- 11/share. In addition, the brokerage believes Vodafone Idea would be able to obtain further bank funding with a significant decrease in bank debt (~ ₹4,500 crore by the end of February 2024). About 70% of the FPO proceeds will be used by Vodafone Idea to expand 4G capacity (40.8k sites), expand 4G coverage (26k sites), and roll out 5G (22k sites). The brokerage thinks that more 4G coverage will contribute to halting short-term 4G market share losses.
Due to its insufficient network spending, Vodafone Idea has lost around 19% of the market since the merger. While some market share losses are anticipated, analysts anticipate Vodafone Idea to close the 4G network coverage gap. The difference in 5G coverage (in comparison to larger counterparts) would still be substantial, though. Kotak Institutional Equities believes that Bharti and R-Jio would not be able to acquire any significant market share since the company's competitors stand to gain more from any future pricing rise and are able to outspend Vodafone Idea on customer acquisition.
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Vodafone Idea owes the Government of India around ₹2.1 trillion, most of which is placed under moratorium until 1HFY26. Repayments to the firm are expected to total ₹29,100 crore in 2HFY26 and ₹43,000 crore a year during FY2027–31. The company's finances ought to improve as a result of the fundraising and possible tariff increase.
Nevertheless, Kotak stated in its research that "we do not see a credible case where (currently ₹8,300 crore) would increase sufficiently to meet large annual dues to the GoI."
The brokerage anticipates that Vodafone Idea would eventually convert a sizable portion of the GoI dues into stock, which may result in significant equity dilution for the company's non-GoI investors.
GoI may ultimately hold around 81% of the shares in the worst-case scenario, with the present promoters' holding diluted to about 9% (from 49% currently and ~38% after the fund-raise) and the non-promoters' stake diluted to about 9% (from 16% currently and ~36% after the fund-raise).
“We raise our FY2025-26E EBITDA sharply on lower subs declines post fund raise and higher ARPU. Rating remains suspended for now," the brokerage said.
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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.