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Reliance Jio threat: Vodafone Idea’s Rs 25,000 crore war chest may not be enough, says report

Sushruth Sunder
Mukesh Ambani, reliance jio, reliance jio number 1, Vodafone Idea, Airtel, airtel, vodafone idea, Reliance Retail

Even as we continue to see intense competition in the telecom space spearheaded by Mukesh Ambani-led Reliance Jio, Vodafone Idea s latest rights issue for up to Rs 25,000 crore will not be enough to turn the firm self-sufficient, according to a report. Unlike Bharti s fund raise, which will help it to deleverage the balance sheet significantly, Vodafone Idea s estimated annual capex requirement and interest burden of over Rs 20,000 crore in FY21 may not be fulfilled even with an optimistic EBITDA of Rs 12,600 crore, noted a Motilal Oswal report. Thus, without an ARPU increase, it may need another round of fund-raise to survive. This highlights Vodafone Idea s desperate need for ARPU accretion over the next two years to survive without incremental funding, which could be seen as an advantage by competitors, the research firm said in a report.

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Motilal Oswal notes that after taking into account the cash flow and capex requirements for telecom players and the current price plans offered, there is a huge opportunity in the space to increase average revenue per user (ARPU). However, there is a huge gap between the product capability of VIL and RJio due to under investment in the former s network. This could reduce over the next 12 months as VIL has aggressive capex plans to bridge the gap and provide robust 4G coverage, noted the report. According to the report, once the network and price arbitrage is reduced, the incremental market share shift should be arrested, which may compel Reliance Jio to start taking price hikes.

Interestingly, even as Reliance Jio continues to make strong additions to its subscriber base, Vodafone idea has continued to lose active subscribers for almost nine consecutive months now. Reliance Jio remained the only telco to add active subscribers; pace of addition, however, slowed to 6.3 million (+8.1 million in Dec-18) from the peak of ~10 million in 2QFY19 when the Jiophone was launched, noted the report.

Voadone lost 6.2 million (-8.8m in Dec-18) active subscribers in Jan-19, with 50bp MoM market share contraction to 37.6%. Vodafone is losing potentially due to (a) implementation of minimum APRU plans and (b) deteriorating network quality, possibly due to network integration issues, the report noted. Motilal Oswal has a target stock price of Rs 40 per share on Vodafone Idea.Vodafone Idea shares closed at Rs 32.05 this afternoon. The target share price implies an upside of more than 25% from the current market price.