What next for Vodafone Idea?

Vodafone-Idea announced it's Q1FY20 Results last week, where it reported a small de-growth Q-o-Q in Total Income. And the market punished the stock with a collapse of over 25% the very next day. Bharti Airtel announced it's Q1FY20 Results this week, where it reported a small increase Q-o-Q in it's Revenues from India Mobile business. And the market rewarded it with a big 7% jump in share price the very next day.

At yesterday's closing price of Rs.6.35 per share, Vodafone Idea Ltd's Market Cap stands at about Rs.18,250 crores. On the other hand, with a share price of about Rs.347, Bharti Airtel's Market Cap stands at about Rs.1,78,000 crores, which it nearly 10 times that of Vodafone Idea Ltd. Isn't this a ridiculous situation?

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I know that Bharti Airtel is not just about India mobile business. It has operations in Africa and few other South-East Asian countries. In India too it has presence in many other telecom & media related businesses, which helps it de-risk it's growth dependence on the India Mobile business. But if we look at the numbers per se, Bharti Airtel's Consolidated Total Income is less than 2 times that of Vodafone Idea. Even it's EBITDA is just about 2.2 times. Then why is the Market Cap nearly 10 times. If we consider Bharti Airtel's growth outperformance compared to Vodafone Idea over the recent couple of quarters, it would be fine to give Bharti Airtel some valuation premium. A Market Cap of 3 or 4 times that of Vodafone Idea would have been fine, but not 10 times.

I am not saying that Bharti Airtel is expensively valued. I am saying that Vodafone Idea's valuations have reached ridiculously low levels. How can the market ignore the fact that Vodafone Idea still has over 300 million active subscribers and now after combining forces, it has the largest pool of liberalized spectrum amongst all the Mobile operators in India. Since the last 6 to 8 months, Vodafone Idea has been working on integrating it's network & spectrum resources. With nearly 2,00,000 towers in use, it will take Vodafone Idea another 8 to 12 months (or little more) to complete the network integration task. But once done, Vodafone Idea will have Data traffic handling capacity far higher than both Airtel & Jio.

Since the month of November 2018, when Vodafone Idea actually started working on integrating the networks of Vodafone India and Idea Cellular, it has been far less aggressive on the marketing & advertising front. It's first priority was to take down equipment from overlapping regions, which would have helped it save on operating costs substantially. And the time lag between taking down one set of equipment and then combining the spectrum resources on the other set of equipment, definitely must have resulted in drop in quality of service for subscribers of both Vodafone & Idea in those regions. Which in turn would have resulted in drop in subscribers and revenues from those regions.

By the end of June 2019, Vodafone Idea is said to have already removed one set of equipment from nearly 38,000 of the nearly 73,000 overlapping sites/locations. I am sure that the company will try & integrate it's spectrum resources at the earliest on towers that are serving high-population density regions or high-revenue generating regions. This will boost it's network capacity first in areas that matter the most. I am expecting Vodafone Idea to finish launching it's integrated network in all urban areas by the end of Q3FY20. Once it covers more than 50% of the urban areas or high-traffic areas, with it's Integrated network, Vodafone Idea will get more aggressive with it's marketing & advertising activities. It's main focus then will be on increasing it's 4G subscriber base count.

As we can see from the charts alongside, Vodafone Idea started falling behind Bharti Airtel in terms of 4G subscriber base count from Q3FY19 onwards. That's when the company started working on shutting down duplicate network sites & then integrating spectrum resources. Q4FY19 and Q1FY20 were expected to be the worst affected. Now that pain period is over. From Q2FY20, the company will start seeing improvement in network performance, region-by-region, which will result in improvement in 4G subscriber and Data traffic growth. In fact I won't be surprised if Vodafone Idea starts outpacing Bharti Airtel on these two counts from Q3 or Q4FY20 onwards, mainly on the back of wider 4G coverage and higher Data handling capacity, by then. It will be a very interesting battle and I am expecting it to start in a true earnest from Q3FY20 onwards.

Both Airtel as well as Vodafone-Idea would like to have 50% of their total subscribers, i.e. about 150 million users, upgrade to 4G services by the middle of next year. Airtel currently leads with 95 million 4G subscribers as compared to 85 million for Vodafone-Idea. But it will be very interesting to see which one of the two reaches 150 million 4G subscribers mark first or which one of the two is leading by the end of June'2020. I would like to place my bets on the dark horse, Vodafone Idea. Let's see if my estimates & expectations do turn out to be true.

Do Share your thoughts on this report or Views on the points discussed. Awaiting your Comments.