Telecom Sector Poised for Growth After FPO, Says Nuvama
Nuvama Institutional Equities has expressed optimism about the future of the telecom sector, citing the successful completion of the follow-on public offer (FPO) by Vodafone Idea and the anticipated positive impacts that it will have.
According to the brokerage, the FPO and other recent events will enable telecom operators to regain their rightful share of the industry’s value triangle, which they had ceded over the last decade. Nuvama expects tariff hikes and government support to enhance operators’ financial performance and returns.
Bharti Airtel Remains Top Pick for Nuvama
Nuvama has identified Bharti Airtel as the best investment option to capitalize on the sector’s growth potential. The brokerage has increased its target price for Airtel, reflecting its belief in the company’s strong position.
Vodafone Idea: Upgrade to ‘Hold’
Nuvama has upgraded Vodafone Idea’s rating to ‘Hold’ and raised its target price. While the brokerage acknowledges that the company has become a ‘going concern’ after its FPO and tariff hikes, it cautions that Vodafone Idea still faces challenges.
Vodafone Idea’s significant liabilities, including Rs 2.5 lakh crore in spectrum and AGR dues, remain a concern for Nuvama. The brokerage believes that even with tariff hikes, the company’s cash flows may be insufficient to meet these obligations once the moratorium period ends in September 2025.
Nuvama highlights the need for Vodafone Idea to secure some form of liability waiver and acknowledges the difficulty of commenting on its possibility given its sub judice status. The brokerage maintains its stance that the company requires capital infusion, tariff hikes, and liability waiver to thrive. However, it currently views the third factor as elusive.
Financial Projections for Vodafone Idea
Nuvama has outlined several scenarios for Vodafone Idea’s financial performance based on potential reductions in its AGR liability. The brokerage expects the company to raise a total of Rs 45,000 crore, including a Rs 25,000 crore debt raise in Q2FY25. Nuvama also predicts capex of Rs 40,000 crore over the next eight quarters and tariff hikes of 10% in Q2FY25 and Q3FY26.
Vodafone Idea management aims to implement multiple tariff hikes in the coming years to improve its average revenue per user (ARPU) and earnings before interest, taxes, depreciation, and amortization (EBITDA). The company targets doubling its EBITDA to Rs 35,000 crore in the next two to three years, which could help it address its debt obligations.
Vodafone Idea Shares Fall
In response to the news, Vodafone Idea’s shares declined by 4.38% to Rs 13.76. The company’s capital raising committee recently approved the allotment of over 16 billion shares at Rs 11 per share as part of its FPO.
