Idea (Vodafone) can be a speculative buy for short-term traders, but long-term investors can avoid it. Here are the reasons why:
Why Vodafone Idea is a speculative buy for traders
Why Vodafone Idea is an AVOID for investors who follow fundamentals
Why Vodafone Idea (Vi) Is A Speculative Buy For Traders
Vodafone Idea has agreed to convert about Rs 16,130 crores of interest liability to equity, which will be taken by the Government of India. After taking the stake, GOI will own 35% of Vodafone Idea.
However, the government has stated that it will take the stake only after Vodafone Idea’s price stabilizes above Rs 10. It is an irrational request,but then markets are irrational.
If we are talking about irrationality, then, yes, Vodafone Idea can cross above 10 bucks, enticing the government and retail investors to jump in.
But will it hold on to Rs 10 levels?
Answers in the next section.
Why Vodafone Idea (Vi) Is An Avoid For Long-Term Investors
To understand Vodafone Idea’s prospects, it is important to know its debt.
As of September 2022, the company has the following debts on its books:
|Long Term Debt||(in Rs crores)|
|Loans from Banks||1,235|
|Deferred Spectrum Payment Obligation||1,95,418|
|Total Long Term Debt||1,99,267|
|Short Term Debt||(in Rs crores)|
|Other Current Loans||13,609|
|Total Short-Term Debt||39,018|
|Total Debt (as of September 2022)||2,38,285|
So, as of September 2022, Vodafone Idea has a total debt of Rs 2,38,285 crores. This does not include any current liabilities.
On the asset side, its two most valuable assets are property, plant, and equipment worth Rs 64,943 crores, intangible assets (brand value) worth Rs 1,00,781 crores, and non-current financial assets worth Rs 8,842 crores. So, Vodafone Idea’s useful long-term assets are worth Rs 1,74,566 crores. The liabilities exceed assets by a whopping Rs 63,719 crores.
Now, let’s check Vodafone Idea’s profitability:
In Q2 2023 (ended September 2022), Vodafone Idea generated an EBITDA of Rs 4,097 crores. However, the quarterly depreciation of Rs 5,656 crores resulted in a negative EBIT of Rs 1,558 crores. The bad news is that interest expense in the same quarter was Rs 6,033 crores.
Now, depreciation is a non-cash charge, and so, it would be safe to assume that Vodafone Idea can generate about Rs 22,624 crores every year (5,656 ✕ 4). Typically, companies that are turning around use a good part of their cash flows to repay debt. But in the case of Vodafone Idea, the cash generated is not enough to service the yearly interest expense of Rs 24,132 (Rs 6,033 crores per quarter).
So, if Vodafone Idea does not have enough cash to service its interest and repay its debts, it will require the government and its lenders to be more lenient with its spectrum dues and lease liabilities – and even if or when that happens, Bharti Airtel and Jio would be breathing down the company’s neck.
Moreover, the government is taking a 35% stake in the company for Rs 16,130 crores, which pegs the company’s valuation at about Rs 46,000 crores. Even that is excessive because its asset–debt shortfall is a whopping Rs 63,719 crores.
Therefore, from the fundamental point of view, it does not make sense to buy Vodafone Idea – there are other solid stocks that are available at a good price.
But traders can chart and play it because the government will invariably take the 35% stake, and it’s possible that there will be operator/HNI/broker activity in the stock. Track its volume and price if you’re interested in trading it.