Vodafone Idea Stock Jumps 35% On Report Of Possible Stake Sale To Google

The Vodafone Idea stock gained about 35 per cent intraday on reports that search engine giant Google is in talks to pick up a 5 per cent stake in the company. The stock ended the day with gains of 12.7 per cent even as the Vodafone Idea management indicated that “there is no such proposal as reported by the media that is being considered at the Board”.

The reports of an investment in Vodafone Idea comes amidst a flurry of fund raising by its larger peers Reliance Jio (Jio Platforms) and Bharti Airtel. While Reliance Industries’ subsidiary Jio Platforms raised Rs 78,562 crore by selling a 17.12 per cent stake to a clutch of investors over the past month, Bharti Airtel raised $2.8 billion (Rs 21,500 crore) earlier this year through a qualified institutional placement and foreign currency convertible bonds. Vodafone Idea which is struggling the most among the trio of private telcos has been struggling to get badly needed cash.

ALSO READ: After flak over Shramik, Rlys says only 71 out of 3,840 trains diverted

While the deal is yet to be consummated, the news of fundraising is incrementally positive for the company, says Credit Suisse. Analysts highlight the valuation difference between Reliance Jio, Bharti Airtel and Vodafone. “After the recent deal, Jio

Platforms has an equity valuation of Rs 4.9 lakh crore, while Airtel’s equity value or market capitalisation is at Rs 3.01 trillion. Vodafone Idea, which is a major competitor to both in its key leadership circles, in comparison is valued at just under Rs 19,000 crore,” says a telecom analyst at a domestic brokerage.

The reason for the valuation differential and as well as the lack of enthusiasm on the part of the Street to the 5 per cent stake sale report is the debt and cash burn at Vodafone Idea. As of December 2019, Vodafone had a gross debt of Rs 1.15 trillion (net debt of Rs 1.03 trillion) with about 76 per cent of the same being deferred spectrum liabilities.

ALSO READ: Govt mulls ban on loose edible oil sales post Covid-19 over health concerns

After posting losses of Rs 14,000 crore in FY19, the company’s reported loss for the first nine months of FY20 is at over Rs 61,000 crore (including exceptional charge related to AGR liability and depreciation of Rs 32,000 crore). Given the stress at the operating level and expectation of continued losses, analysts believe that it needs a lot more money than the 5 per cent stake sale which given the equity value will fetch under Rs 1,000 crore. “With a cash burn between Rs 4,000 crore to Rs 6,000 crore per quarter, Vodafone Idea would require at least Rs 25,000 crore annually to sustain its operations. Unless it is able to attract a large investment, the investment may not make much of a difference, says an analyst.

Vodafone Idea have a few options including the sale of its stake in Indus Towers (Rs 3,000 crore) and fibre assets (may be valued at $1.5 billion to $2 billion) among others. GV Giri and Balaji Subramanian of IIFL Securities expect Vodafone’s debt to fall by Rs 10,000 crore from its stake sale in Indus and equity infusion from Vodafone Plc if the latter brings down its 29 per cent stake in the merged tower company to 13 per cent. This coupled with Vodafone Plc’s Rs 8,400 crore indemnity to

Vodafone Idea on the AGR case, potential GST refund and relief on AGR and other regulatory dues could help reduce net debt to operating profit of Vodafone Idea to under 10 times from the current high levels. Further, an increase in industry average revenue per user of 20 per cent per annum over the next three years could double Vodafone Idea’s operating profit and help it survive, they add.