Foreign brokerage Goldman Sachs said Vodafone Idea Ltd shares have potential to hit Rs 19 level in a blue-sky scenario, in which it took into account a few optimistic assumptions including a reversal in subscriber erosion, with additions starting in FY27. The blue-sky scenario factors in continued increases in tariffs until FY30 and a 65 per cent lower AGR liability. It assumes that the court will accept Vodafone Idea’s self-assessed AGR liability and a waiver of the penalty.
Besides, the blue-sky scenario for Vodafone Idea assumes conversion of AGR/spectrum dues into equity until FY28.
In such a case, Goldman Sachs sees 300 basis points (bps) higher annual revenue growth for Vodafone Idea against the base case, with revenue market share broadly flat against a 300 bps decline in the base case.
"However, even in our blue-sky scenario, we see FCF being negative whenever AGR/spectrum repayments start. We see 26 per cent upside from current levels in a blue-sky scenario for Vodafone Idea, vs 83 per cent downside to our target price in our base case," Goldman Sachs said.
Below its the table reflecting both the base and blue-sky scenarios.
Earlier today, Vodafone Idea Ltd came under pressure after Goldman Sachs suggested a target of Rs 2.50 per share on the telecom stock. The target hinted at a potential 83 per cent downside ahead.
Goldman Sachs said the recent capital raise, while incrementally positive, is unlikely to be adequate to stop the company's market share erosion in its base case.
Peers are spending at least 50 per cent higher capex that Vodafone Idea, Goldman Sachs said adding that its analysis suggested a direct correlation between capex and revenue market share. The brokerage sees another 300 basis points share loss for Vodafone Idea over the next 3-4 years.
"Additionally, Vodafone Idea has large AGR/spectrum related payments starting in FY26; while the government has the option of converting some dues into equity, we estimate ARPUs would have to rise by Rs 200-270 (120-150 per cent under different scenarios) vs Dec "24E levels for Vodafone Idea to be sustainably free cash flow neutral, a low probability in the medium term in our view," it said.
Excluding the impact from any such potential conversion, Goldman Sachs expects free cash flow (FCF) for Vodafone Idea to be negative at least until FY31. It expects Vodafone Idea's net-debt-to-Ebitda will remain elevated at 19 times by March 2025.
"We continue to expect its balance sheet to remain stretched even after potential government conversion of near-term dues into equity. Additionally, Vodafone ldea trades at 24 times FY26E EV/Ebitda, a sharp premium vs Bharti's India business at 12 times despite its weaker growth and returns profile; we forecast mid-single digit CROCI for Vodafone Idea during our forecast period vs 17-18 per cent for Bharti/Jio," Goldman Sachs said.