Vodafone Idea Ltd. announced it's Q1FY20 Results about 10 days ago. Before the announcement, it's share price was trading close to Rs.10 levels, resulting in a Market Cap of just about Rs.28,000 crores. This in itself was ridiculous valuations for a company that still is India's No.1 or 2 mobile operator with over 300 million active users.
After the result announcement, Vodafone Idea's share price has crashed and is now close to Rs.5 levels!! That means it's Market Cap is just about Rs.15,000 crores now. This is an even super-ridiculous valuation. Now the big question is: Are things really so bad with the business of Vodafone Idea? Or is the market writing-off it's chances of survival too early?
Let's put some things in perspective. In 2017, when Vodafone India and Idea Cellular announced their decision to merge, they were the No.2 and No.3 mobile operators in the country, with each having a subscriber base of between 180 to 200 million. By the time the merger was approved in July-August 2018, they together had over 400 million subscribers. It was widely expected at that point that atleast 20 to 30% of their subscribers could be common, holding sim cards of both Vodafone & Idea. That means about 40 to 60 million subscribers of Vodafone, could also be having Idea sim card in their Dual-sim phones. Hence it was obviously expected that most of these subscribers will stop using either 1 of the two sim cards after the merger of the two operators.
Now look at the table alongside. The merger was formally concluded on 31st August'2018. By the end of that quarter, it's VLR (active) user base stood at just under 403 million, which started dropping at a faster and faster pace over the next 3 quarters and now stands at 322.4 million. That means Vodafone Idea has seen a drop of nearly 20% of it's active users base, most of it after Q3FY19. This should have resulted in a significant drop in the company's revenues. But if you look at the Total Income figures from Q3FY19 onwards, there has been barely a drop of about 3% till now.
What does this indicate? It clearly indicates that most of the 20% users who exited the Vodafone Idea network during the last 3 quarters, were not generating any revenues for the company. Isn't this good that the free-loaders have been removed from the network?
Now let's look at the other developments: Post the merger getting officially effective, the company had a massive task at hand, which was to integrate it's Networks, it's Administrative offices, it's Retail units, it's Staff, it's IT Systems, etc. After a couple of months of planning, the integration activities must have started sometime in November or December'2018. The biggest one of these to Integrate the Network sites & combining the Spectrum resources. This alone will take about 18 to 24 months to complete as they will have to physically do the integration activities on about 2,00,000 towers.
During this Network integration work, the Quality of Service certainly must be getting affected in regions where it is being undertaken at different points of time. Hence the company has not been aggressively marketing it's services to attract newer users on it's network. It is just trying to hold on to it's revenue-generating users. And I think it is doing a very fine job with it as it's Revenues are pretty stable even during this massive Network integration activities.
Once the company will have finished integrating & upgrading the networks in most of the Urban areas or high-population regions across the country, I am expecting the company to get lot more aggressive with it's marketing. At that time the company will have lot more capacity & coverage to offer to all it's old & new users. I think that point is still a couple of quarters away. Possibly during Q3FY20 or Q4FY20 is when Vodafone Idea is expected to get aggressive with it's marketing efforts.
Even with limited marketing efforts, Vodafone Idea has managed to increase it's 4G user base from 66 million to 85 million over the last 3 quarters. It's pace of growth is certainly slower than that of Airtel, but we cannot ignore the fact that Airtel is going full throttle with it's advertising & marketing efforts, while Vodafone Idea has curtailed the same till it's network is ready to offer better coverage & quality of service. The Total Data Volume on the network is increasing at a pace faster than the increase in number of 4G subscribers, reflecting the fact that each user is now consuming higher quantity of Data and the network is also able to offer the same. In the coming quarters, when the 4G user base is set to grow at a faster pace, we can expect to see the Data Volumes to grow even faster. Voice Minutes on the other hand are reporting a de-growth, mainly because of exit of many voice-only and that too incoming-only users from the network. The average voice usage per user is actually reporting an increase.
Going forward, I am expecting the consistent drop in VLR base, Quarter after quarter, since the last few quarters, to start reversing, possibly from Q3FY20 onwards. Even in Q2FY20, the drop in VLR base will be very small. Once the VLR numbers get steady, Vodafone Idea will start reporting some decent growth in it's Revenues on the back of increase in proportion of 4G users. Vodafone Idea's EBITDA margin currently is about 15 to 17%. I am expecting this to improve to about 22 to 25% in the next few quarters, mainly because of reduction of operating costs due to closure of more & more duplicate network sites of erstwhile Vodafone & Idea. By the end of this fiscal, most of the one-time costs in terms of compensations & penalties towards early termination of rental agreements with various Tower companies, will also be over. Then we will see massive change in the Net Loss figures reported by the company. From the current Quarterly Net Loss figures of over Rs.4,500 crores, we could see the figure drop to well under Rs.1,000 crores, possibly from Q4FY20 or Q1FY21.
Considering all these factors, do you think Vodafone Idea's business is doing so poorly to deserve a Market Cap of just about Rs.15,000 crores??
Do Share your thoughts on this report or Views on the points discussed. Awaiting your Comments.
After the result announcement, Vodafone Idea's share price has crashed and is now close to Rs.5 levels!! That means it's Market Cap is just about Rs.15,000 crores now. This is an even super-ridiculous valuation. Now the big question is: Are things really so bad with the business of Vodafone Idea? Or is the market writing-off it's chances of survival too early?
Let's put some things in perspective. In 2017, when Vodafone India and Idea Cellular announced their decision to merge, they were the No.2 and No.3 mobile operators in the country, with each having a subscriber base of between 180 to 200 million. By the time the merger was approved in July-August 2018, they together had over 400 million subscribers. It was widely expected at that point that atleast 20 to 30% of their subscribers could be common, holding sim cards of both Vodafone & Idea. That means about 40 to 60 million subscribers of Vodafone, could also be having Idea sim card in their Dual-sim phones. Hence it was obviously expected that most of these subscribers will stop using either 1 of the two sim cards after the merger of the two operators.
What does this indicate? It clearly indicates that most of the 20% users who exited the Vodafone Idea network during the last 3 quarters, were not generating any revenues for the company. Isn't this good that the free-loaders have been removed from the network?
Now let's look at the other developments: Post the merger getting officially effective, the company had a massive task at hand, which was to integrate it's Networks, it's Administrative offices, it's Retail units, it's Staff, it's IT Systems, etc. After a couple of months of planning, the integration activities must have started sometime in November or December'2018. The biggest one of these to Integrate the Network sites & combining the Spectrum resources. This alone will take about 18 to 24 months to complete as they will have to physically do the integration activities on about 2,00,000 towers.
During this Network integration work, the Quality of Service certainly must be getting affected in regions where it is being undertaken at different points of time. Hence the company has not been aggressively marketing it's services to attract newer users on it's network. It is just trying to hold on to it's revenue-generating users. And I think it is doing a very fine job with it as it's Revenues are pretty stable even during this massive Network integration activities.
Once the company will have finished integrating & upgrading the networks in most of the Urban areas or high-population regions across the country, I am expecting the company to get lot more aggressive with it's marketing. At that time the company will have lot more capacity & coverage to offer to all it's old & new users. I think that point is still a couple of quarters away. Possibly during Q3FY20 or Q4FY20 is when Vodafone Idea is expected to get aggressive with it's marketing efforts.
Even with limited marketing efforts, Vodafone Idea has managed to increase it's 4G user base from 66 million to 85 million over the last 3 quarters. It's pace of growth is certainly slower than that of Airtel, but we cannot ignore the fact that Airtel is going full throttle with it's advertising & marketing efforts, while Vodafone Idea has curtailed the same till it's network is ready to offer better coverage & quality of service. The Total Data Volume on the network is increasing at a pace faster than the increase in number of 4G subscribers, reflecting the fact that each user is now consuming higher quantity of Data and the network is also able to offer the same. In the coming quarters, when the 4G user base is set to grow at a faster pace, we can expect to see the Data Volumes to grow even faster. Voice Minutes on the other hand are reporting a de-growth, mainly because of exit of many voice-only and that too incoming-only users from the network. The average voice usage per user is actually reporting an increase.
Going forward, I am expecting the consistent drop in VLR base, Quarter after quarter, since the last few quarters, to start reversing, possibly from Q3FY20 onwards. Even in Q2FY20, the drop in VLR base will be very small. Once the VLR numbers get steady, Vodafone Idea will start reporting some decent growth in it's Revenues on the back of increase in proportion of 4G users. Vodafone Idea's EBITDA margin currently is about 15 to 17%. I am expecting this to improve to about 22 to 25% in the next few quarters, mainly because of reduction of operating costs due to closure of more & more duplicate network sites of erstwhile Vodafone & Idea. By the end of this fiscal, most of the one-time costs in terms of compensations & penalties towards early termination of rental agreements with various Tower companies, will also be over. Then we will see massive change in the Net Loss figures reported by the company. From the current Quarterly Net Loss figures of over Rs.4,500 crores, we could see the figure drop to well under Rs.1,000 crores, possibly from Q4FY20 or Q1FY21.
Considering all these factors, do you think Vodafone Idea's business is doing so poorly to deserve a Market Cap of just about Rs.15,000 crores??
Do Share your thoughts on this report or Views on the points discussed. Awaiting your Comments.
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