Ahead of Vodafone Idea Ltd (VIL) March quarter results later today, Kotak Institutional Equities in its latest note said Vodafone Idea's high-risk, high-reward optionality is in play but several things need to fall in place including further government relief measures, moderation in competitive intensity and VIL's execution to avert further subscriber losses.
Kotak said Vodafone Idea's recent fund-raise ensures continuation of 3+1 market construct in the medium term. With easy subscriber gains from Vodafone Idea unlikely, other telecom operators' focus could shift from land grab to generating adequate returns through tariff hikes.
The domestic brokerage is building in 15 per cent tariff hike in December 2025 against 10 per cent earlier, in addition to its expectation of 20 per cent tariff hike in June 2024 after the general elections.
"Our scenario analysis indicates a high risk-reward skew for Vi (bull-case FV: Rs 23; bear case Rs 7). However, long-term revival still hinges on government's relief measures and moderation in competitive intensity. We reinstate Vodafone Idea at SELL with Rs 10 fair value, as we await signs of market share stabilisation and more clarity on potential GoI relief measures/dilution before turning more constructive," Kotak said.
Kotak said it does not build in AGR dues waiver in its base case. But a potential waiver (Rs 35,000 crore) could drive Rs 5 per share (or 52 per cent) upside to its fair value.
Kotak said while Reliance Jio's participation in industry-wide tariff hike remains debatable, it expects the RIL arm to be a more willing participant in industry’s efforts to raise tariffs, given its larger 5G investments, further moderation in RoCEs and FCF and potential JPL IPO on the horizon.
It said VIL's recent fund raise and likely tariff hikes should improve fortunes in the medium term but it still expects the telecom operator to face large cash shortfall.
Vodafone Idea's long-term revival remains contingent on further relief measures from the govrnment. With GoI’s intention of maintaining a 3+1 market construct in the Indian telecom sector, Kotak said there could be further reform measures such as extension of moratorium, part waiver of AGR dues, and/or equity conversion of Vi’s deferred dues.
"Apart from GoI relief, we believe Vi also requires a moderation in competitive intensity. A sharper tariff hike (Rs 10 per month higher) could drive Rs 3 per share (28 per cent) upside to our FV for Vodafone Idea. Further, we still build in 3 per cent subscriber market share loss for Vi over FY2024-27E, and superior execution to avert subscriber losses could improve investor confidence and drive further upsides," it said.