5G Rollout And Tariff Hikes Will Strengthen Market Position

Key Takeaways

• Vodafone Idea's strategic 4G and 5G expansions aim to drive subscriber retention and growth, enhancing ARPU and boosting revenue.
  
• Planned tariff hikes and digital service initiatives are expected to increase ARPU and net margins, supported by government and funding assistance.
  
• Vodafone Idea faces financial strain from low ROCE, high debt, and investment demands, relying on tariff hikes and regulatory support to sustain growth.

Catalysts

Provides mobile telecommunication services in India.

• The expansion and improvement of Vodafone Idea's 4G network, with plans to further increase coverage and capacity, are expected to drive subscriber additions and retention, potentially leading to increased revenue and improved profitability.
  
• The company's strategic 5G rollout in key cities such as Mumbai, Delhi, and Bangalore is anticipated to not only retain existing customers but also attract new high-value users, supporting revenue growth and enhancing ARPU (Average Revenue Per User).
  
• Planned tariff hikes, as mentioned for July 2024 and anticipated in the future, are expected to positively impact ARPU and overall revenue by ensuring better alignment of charges with data consumption.
  
• Strategic initiatives to bolster digital services and partnerships, such as enhanced Vi Movies & TV offerings and business services expansion, aim to increase customer engagement and open new revenue streams, thus potentially improving net margins.
  
• Continued support from the government, such as the waiver of bank guarantees for spectrum, combined with ongoing debt funding efforts, should provide the necessary financial leeway to sustain network investments and operational enhancements, ultimately benefiting earnings.

Vodafone Idea Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vodafone Idea's revenue will grow by 11.8% annually over the next 3 years.
• Analysts are not forecasting that Vodafone Idea will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Vodafone Idea's profit margin will increase from -64.7% to the average IN Wireless Telecom industry of 16.7% in 3 years.
• If Vodafone Idea's profit margin were to converge on the industry average, you could expect earnings to reach ₹100.8 billion (and earnings per share of ₹1.15) by about March 2028, up from ₹-278.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, up from -1.8x today. This future PE is lower than the current PE for the IN Wireless Telecom industry at 49.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.09%, as per the Simply Wall St company report.

Vodafone Idea Future Earnings Per Share Growth

Risks

• The telecom sector in India, including Vodafone Idea, currently experiences low Return on Capital Employed (ROCE), indicating challenges in recovering costs through current revenue streams. This points to ongoing pressure on net margins and earnings.
  
• The telecom industry requires substantial investment to support rapidly growing data consumption and emerging technologies. Insufficient investment or rising capital expenditures could strain cash flows and impair earnings.
  
• The need for further tariff increases suggests current pricing is insufficient for sustaining growth, potentially impacting customer retention and revenue if not carefully managed.
  
• The financial conditions highlight substantial debt obligations, including AGR dues and spectrum liabilities, which may lead to significant cash outflows in upcoming years, impacting net margins and profit.
  
• Dependence on regulatory support, such as government waivers on bank guarantees, suggests a precarious financial position. Any adverse change in government policy could negatively affect the company’s balance sheet and future earnings.

Valuation

• The analysts have a consensus price target of ₹8.05 for Vodafone Idea based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹15.0, and the most bearish reporting a price target of just ₹2.4.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹602.1 billion, earnings will come to ₹100.8 billion, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 19.1%.
  
• Given the current share price of ₹7.07, the analyst price target of ₹8.05 is 12.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.