What is the future of the stock Vodafone Idea under the current circumstances??

Background:

The Vodafone-Idea(VIL) came into being on 31 August 2018 with the Vodafone Group holding 45.2%, the Aditya Birla Group holding 26%, and the remaining shares held by the public.

Post the merger in 2018, the new entity was the largest telecom company in India by subscriber base and by revenue.

The telecom space post the merger was narrowed to three players:

• Vodafone-Idea
• Reliance Jio, and
• Bharti Airtel

Performance Since Merger:

The stock journey since the merger has been as shown below. We can see that the stock had been sliding even before the merger and now it is very much in the INR 0–20 range (qualifying as what can be best called a penny stock).

As of August 2021, it is in third place owing to subscriber base & overall performance as compared to its peers.

Reasons for Y-o-Y(Year-on-Year) decline:

1. Entry of Reliance Jio and disruption of prices. – Voice. Text and Data
2. Non-reversal of decrease in subscriber base trend
3. Lackluster product offerings leading to an Average Revenue Per User (ARPU) of ~Rs 107
4. Legal entanglement of Vodafone in a $2.5 billion tax dispute with the Indian Income Tax Department over its purchase of Hutchison Essar Telecom services in April 2007 (Resolved with burying of the tax)
5. Losses & Debt amounting to ~Rs 1.8 lakh crore. The combined entity (Vodafone-Idea) is yet to report a quarterly profit since the merger
6. AGR dues of Rs 50,400 crore (as mandated by the Supreme Court)
7. Payment of spectrum installment of over ₹8,200 crores (due in April 2022)

To add to the conundrum, Aditya Birla Group chairman Kumar Mangalam Birla has offered to transfer the group’s entire ownership in Vodafone Idea Ltd to the government.

He also stepped down from the board of Vodafone Idea (Vi) this week as the non-executive chairman in order to protect Aditya Birla Group (ABG) companies from any impact owing to default by Vi in the future.

The immediate impact was felt on the stock with a correction of ~25%

To compound matters further, Vodafone Group CEO Nick Read rules out fresh fund infusion in Vi

Is Turnaround Possible?

This paints a really grim picture of Teleco with sustenance seeming really unlikely. Despite this there are some silver linings that can keep it afloat and grow:

1. Burying of Retrospective Tax Demand: The government passed the Taxation Law(Amendment) Bill 2021 on 6th August 2021 thereby burying the draconian law. The stock bounced by ~19% owing to this
2. Raising of Capital: The Vi Group has been trying to raise money futilely till now. Any venue for fundraising can be a huge plus for the company and the stock
3. Relief package: The government is planning to bring a package that can provide telecos relief with regards to AGR demand. Based on the terms and quantum of relief, the stock can show upward movement

Till then, it will be a roller coaster for the stock, investor and the company(Vodafone-Idea). It is best to abstain from it till there is clarity.

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Happy Investing!

References:

1. https://www.business-standard.com/article/companies/vodafone-group-ceo-nick-read-rules-out-fresh-fund-infusion-in-vi-121080302021_1.html
2. https://economictimes.indiatimes.com/markets/stocks/news/vodafone-idea-surges-19-on-retro-tax-changes/articleshow/85090702.cms
3. https://www.indiatoday.in/business/story/relief-package-likely-for-stressed-telecom-sector-here-s-all-you-need-to-know-1836742-2021-08-04
4. https://www.livemint.com/companies/news/telecom-watchdog-wants-govt-to-reject-vi-plea-for-deferring-payments-11625412130651.html