VodafoneIdea vs BhartiAirtel - Q3FY20 comparison

A couple of days ago I read a headline in some business news media that Bharti Airtel has overtaken HDFC Bank in Market Cap terms with a value of nearly Rs.2.78 lakh crores. Then I checked the Market Cap of Vodafone Idea, which is a part of my #StocksLogicPortfolio, and found it to be around Rs.12K crores only, i.e. about 4% of Bharti Airtel's Market Cap. Then I thought of comparing some important Operational numbers of both companies to see if this super-wide gap in the way both companies are valued is fair or not.

Both Vodafone Idea & Bharti Airtel are telecom service providers and compete in the Indian Mobile Services market are mostly the only things common between them. Beyond that there are a lot of differences. While Vodafone Idea is primarily a Mobile Service provider with a very small scale Wireline/Broadband operation in India and has some stake in Indus Towers. That's it. On the other hand, Bharti Airtel has several business verticals: Firstly, it is a Mobile Service Provider in 18 countries in Asia & South Africa, with India forming nearly 75% of it's Customer Base. But apart from that, Bharti Airtel is a significant player in Wireline/Broadband, Direct-to-Home & Payment Bank services in India. Hence Bharti Airtel certainly deserves some premium for it's diversification into more markets for Mobile Services & into more services in India. It's Indian Mobile Services business contributes nearly 50% of it's Consolidated Revenues, as of #Q3FY20. This share is set to increase from #Q4FY20 onwards because of the tariff hikes effected from December'19 by the entire Indian Mobile Services industry.

Now lets look at some Important Numbers for Comparison in the table alongside. In terms of Wireless Customer base, Minutes on Network & Data Volume, Vodafone Idea's numbers are around the 70% mark of Bharti Airtel's numbers. But in terms of Total Income, Vodafone Idea is closer to 50% mark of Bharti Airtel, mainly because of the reasons I have mentioned in the previous paragraph. Vodafone Idea's EBITDA is lower at around 40% of Bharti Airtel, primarily because the former is still in the process of Integrating the two different networks of Vodafone India and Idea Cellular into one. By the end of Q3FY20, the company is said to have removed duplicate equipment from nearly 58,000 towers out of 73,000 towers which carried equipment of both individual operators at the start of integration process. We should see progressive improvement in this department for Vodafone Idea over the next 2 to 4 quarters, as it completes removing duplicate equipment from remaining 15,000 towers.

Coming to Net Debt figures, Vodafone Idea's figure is 10% lower than that of Bharti Airtel. But still the former's Interest Cost is 25% higher than that of the latter. Surprising, isn't it? It's clear that Bharti Airtel has raised Debt from lower cost sources compared to Vodafone Idea. Considering the current situation where world over the Central Banks are cutting rates to boost liquidity in the markets, Vodafone Idea can look for swapping it's higher-cost debt with lower cost ones. This can translate to substantial savings in terms of Quarterly Interest Cost & them help take on more Debt for it's AGR dues payout that will have to happen sometime soon. Let's hope to see some progress on this front too in the next couple of quarters.

Coming to Depreciation figures, it includes Depreciation provisioning for CAPEX done as well as the Lease rentals paid to Tower companies. With Vodafone Idea expected to exit duplicate tenancies from another 15,000 towers over the next 2 or 3 of quarters, we can expect reduction in Depreciation figures for the company progressively over the next 2 to 4 quarters. This will help bring down the % comparison figure with that Bharti Airtel, which currently stands at about 85%.

What should be the Valuation Comparison now & in coming Quarters: Considering all the negatives from this comparison for Vodafone Idea, like lower EBITDA %, higher Interest Cost, potential of significant jump in Debt post AGR issue closure, I think Vodafone Idea deserves a Market Cap of around 8 to 10% of Bharti Airtel, which currently stands at Rs.2,73,870 crores. That means Vodafone Idea's Market Cap should be (as per my estimates) between Rs.22K to 27K crores, translating into a share price of around Rs.7.80 to Rs.9.60. That means Vodafone Idea is currently trading at nearly half of my estimated value, in comparison to Bharti Airtel's value. If Vodafone Idea makes decent progress in the coming quarters on the above discussed parameters, in comparison with Bharti Airtel's respective figures, I will certainly push up the Market Cap % range for Vodafone Idea, compared to that of Bharti Airtel. I will try to present the above Comparison Table after the Results declaration for every quarter for both companies so that we can check if Vodafone Idea is making any progress or not in comparison to Bharti Airtel's performance.

What are the chances of survival for Vodafone Idea Ltd?

I have been closely following the developments of the Telecom Sector in India since a long time & especially that of Vodafone Idea Ltd., from even before their Merger was formally announced. I have been sharing my views on the sector on a regular basis. This one I am writing after a gap of over 6 months.

During the last 6 to 8 months, there have been 2 big developments: (1) Reliance Jio's decision to start charging IUC from customers in early October'19; (2) The SC order on AGR case, which went brutally against Vodafone Idea & Bharti Airtel.

The First Big Development was terrific news for the entire Telecom sector in India. That was the first sign of tariff hike from Reliance Jio, which had single-handedly brought the sector to it's knees by launching revolutionary tariff plans a couple of years ago. Tariff hike from Reliance Jio meant that others in the business, i.e. Airtel & Vodafone Idea, too can think of charging more for their services. This was a very BIG Development for the sector & no wonder that we saw share prices of all these businesses rallying strongly.

Then came the Second Big Development, where the SC brutally thrashed the arguments of the Telecom Operators and asked them to make humongous payments towards disputed AGR dues + Interest for the last 1.5 decade + Penalties on delayed payment + Interest on those Penalties. The amounts being spoken are in excess of Rs.35,000 crores for Bharti Airtel and in excess of Rs.50,000 crores for Vodafone+Idea. Several pleas requesting SC to take sympathetic view & review it's Order have been thrashed again. Even when the Govt of India is ready to compromise, knowing fully well that the Huge amounts could crush the chances of survival for 1 of the only 3 major telecom players in the country, the SC is just not ready to budge.

The media & the stock market seem to have written off the chances of survival for Vodafone Idea Ltd. in the face of the repeated SC thrashing. Now let's look at some facts & try to analyse the chances of survival for the operator who was the largest one in the country until a few months ago. First let's look at the operational part. Have a look at the following charts which are representing the Quarterly Progress of 2 important numbers: Subscriber base and the company's Quarterly Total Income:

The merger of Vodafone India & Idea Cellular got legally effective from the end of August'2018. Hence the Total Income figures for June'18 & Sept'18 cannot be compared with following numbers. Let's look at the numbers from Q3FY19 (i.e. Dec'18) onwards. Vodafone Idea's subscriber base stood at about 387 million by the end of Dec'18, comprising of 72% 2G users, 19% 4G users & remaining 3G users. In the next 4 quarters, i.e. by the end of Dec'19, Vodafone Idea's total subscriber base dropped over 20% to reach 304 million. 61% of those were 2G users (33% drop in numbers), 34% of those were 4G users (38% jump) and remaining 5% were 3G users (56% drop).

This massive erosion of 2G & 3G subscriber base, resulting in over 21% drop in overall subscriber base, should have impacted the company's Total Income by atleast 15%, isn't it? But look at the Total Income chart. The drop is barely 5% in Vodafone Idea's Quarterly Total Income. That means the 29 million extra 4G customers that Vodafone Idea managed to add during those 4 Quarters, managed to compensate over 75% of loss of Revenues from the 112 million drop in 2G & 3G

customer base of the company. Now have a look at the chart alongside:

Between Q3FY19 and Q3FY20, the Data Volume carried by Vodafone Idea on it's network jumped 40%. This figure closely co-relates to the 38% jump in it's 4G customer base. During the same period, the Voice Calls traffic has dropped by about 12%, reflecting the drop in Voice-only users from it's network, despite increase in Voice usage by most users across the country due to Unlimited Calling Plans.

With every passing quarter, Vodafone Idea is launching it's stronger & higher capacity Integrated network in more & more districts. By the end of Dec'19, it had completed rollout of it's Integrated network in 86% of the districts. This will help the company increase it's aggression in capturing more & more 4G customers. In each of the last 2 quarters, Vodafone Idea added over 8 million 4G users to it's network. I think this figure can jump in coming quarters. Combine this with the near 30 to 40% tariff hike that the entire industry undertook in Dec'19, which will start reflecting in Revenue numbers for all operators from Q4FY20 onwards, and we will see Vodafone Idea getting much stronger than before. Even a 20 to 25% jump in ARPU will result in Vodafone Idea's Quarterly Revenues jumping by around Rs.2500 to 3000 crores. And with continued growth in 4G user base, this jump could be higher.

Survival past AGR issue: Assuming the worst case scenario that Vodafone Idea is made to pay over Rs.50,000 crores over the next 15 years or so, at an Interest Rate of about 8% p.a., Vodafone Idea will see it's Annual Interest Cost increase by about Rs.4,000 crores. It's Annual Interest cost currently stands at about Rs.14,000 crores, which will jump to about Rs.18,000 to 19,000 crores. With the recent tariff hike & aggressive push to increase it's 4G user base, I am expecting Vodafone Idea to be reporting Annual Revenues of over Rs.62,000 crores in FY'21, which could keep growing at a conservative figure of about 5% Y-o-Y for the next many years. Now all that it needs to do is to manage all it's Operating & Other Costs (including Lease Rentals) within a figure of about Rs.40,000 crores a year, which will allow it to survive in the next year and then get stronger again with every passing year. There are more possible positives in the form of potential Debt Restructuring to a lower Interest Rate after the recent slashing of Rates by the RBI and possible Fund Raising via sale of it's stake in Indus Towers and it's Fibre Assets. A 1% reduction in Interest Rate on all it's Borrowings alone can reduce it's annual Interest Cost by Rs.1,500 to 2000 crores.

Vodafone Plc and Aditya Birla Group together own almost 75% of Vodafone Idea. They are smart business people. I don't think any businessman would give up on a business which has the potential to generate well over Rs.10 lakh crores in Revenues and an EBITDA of over Rs.2.50 lakh crores over the next 15 years, just for the sake of avoiding a payment of Rs.50,000 crores or so.