The stocks of both Vodafone Idea and Indus Towers suffered a significant decline on September 6 as Goldman Sachs issued a research report through which the telecom companies have been raised concern. In the same period, the Vodafone Idea shares declined by more than 13 percent to Rs 9 which was the lowest so far for the past 52 weeks. 55 after the stock rating company Goldman has come up with ‘Sell’ signal on the equity but has raised a small target of Rs 2. 5 from Rs 2. 2 which predicted an 83% down side risk of the stock price. In this report, Goldman pinpointed on challenges of breaking even on Free Cash Flows as well as challenges of recapturing market share.
It appeared that Vodafone Idea had no future with Goldman expecting Vodafone Idea to lose another 300 bps in market share in the next 3-4 years. Not even in the rosiest scenario wherein AGR dues are reduced by 65%, tariffs rise unabated with no immediate government receivables, can Goldman seethat the implied per share value will not go over Rs19.
“Vodafone Idea has large AGR/spectrum-related payments starting in FY26; while the government has the option of converting some dues into equity, we estimate ARPUs would have to increase by Rs 200-270 vs Dec ‘24E levels to make Vodafone Idea sustainably free cash flow neutral in our view – a low probability in the medium term in our view,” said Manish Adukia from Goldman.
Vodafone Idea recently mobilized Rs 20,100 cr through both Follow-on public offer and promoters’ funding. It also intends to access the debt market for Rs 25,000 crore also will be raised as the debt. However, as per the Goldman Sachs, the company has to reach ARPU level of 2 in order to become free cash flow neutral as envisaged for Vodafone Idea. 2 to 2. Mercer International Inc. has forecasted to increase the levels by FY27 with December 2024 as the baseline by 500 percent.
“To reach FCF neutral, we estimate ARPUs to reach 2. 2-2. 5 x Dec ‘24E levels by FY27E, we forecast an annual ARPU increase of about 15% as seen in the recent tariff hikes; hence achieving FCF neutral will take Vodafone Idea about 6-7 years of 15% tariff increases every year,” the brokerage said.
The counter of Indus Towers plunged over 6 percent after yesterday’s down gradation ‘Sell’ from ‘Neutral’ rating by Goldman Sachs while upping the target price to Rs 350 from the earlier Rs 220. Goldman highlighted that the company fundamentals are oversold while at the same time pointing that re-rating of Indus Towers is overdone. Medium and long-term outlook on growth is not very clear to the firm. However, Goldman Sachs would embrace such a strategy only if one of Indus’s major clients, Vodafone Idea, can fix its balance sheet.
For instance, the share prices of Indus Towers have risen by more than 75 percent in the least half year and is presently trading at Rs443, whereas Goldman Sachs has set a target price at Rs350 for the firm’s stocks.
But for Bharti Airtel, Goldman Sachs increased its target price to Rs 1,700, thus, giving an upside of 10 percent to the stock that is currently trading in global markets. The firm has also maintained its ‘Buy’ rating, thus meaning that its rating for the Martha company is still favorable. Global brokerage described growth trajectory and FCF and returns profile hence arguing that Equities deserved the premium multiple that was is being attached to it.
The growth momentum at Goldman says is likely to be sustained, by market share gains, Organic go to-wins, possible future tariff increase. The revenues and EBITDA of the company in India is anticipated to witness the growth rate of the 16 percent and 21 percent CAGR for the financial year ending 2027. Further, in financial outlook, Goldman believes that Bharti Airtel will also be able to make enhancements on its balance sheet. In the context of the company, the brokerage firm has predicted that the company’s net debt to be at zero level by the end of fiscal 2028.
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References:
- https://economictimes.indiatimes.com/markets/stocks/news/vodafone-idea-shares-plunge-14-after-goldmans-target-price-of-rs-2-5/articleshow/113114084.cms?from=mdr
- https://www.livemint.com/market/stock-market-news/vodafone-idea-share-price-cracks-over-14-as-goldman-sachs-predicts-83-downside-in-stock-11725598351183.html
