Nuvama Institutional Equities said on Wednesday that Vodafone Idea Ltd's successful follow-on public offering (FPO) and the subsequent chain of events mark an inflection point in the telecom sector. The domestic brokerage said the events should allow telecom operators to recapture their due portion of the telecom sector value triangle, which has been ceded over the last decade.

The firm said it has turned positive on the telecom sector, believing that a combination of tariff increases and government support will strengthen the operators' financials and returns profiles. While Nuvama believes Bharti Airtel Ltd is the greatest method to capitalize on this occurrence in the sector and enhance its target price. Nuvama has also raised Vodafone Idea's price target and upgraded it to a 'Hold' rating, citing the company's progress toward becoming a 'going concern'.

"We are biding our time for more concrete steps to play out and Vodafone Idea becoming an investible idea," according to the statement.

Vodafone Idea Price Target

Nuvama raised Vodafone Idea's target price to Rs 14 from Rs 7 previously and recommended a 'Hold' recommendation for the stock. It stated that Vodafone Idea's major issue, even after its FPO and rate hikes, is its stretched financial sheet, which is burdened with obligations of Rs 2.5 lakh crore and Rs 2.1 lakh crore for spectrum and AGR, respectively.

Vodafone Idea's cash flows, even at higher charges, should be insufficient to satisfy these obligations once the moratorium expires in September 2025.

"As a result, it requires some form of liability waiver. Even if it receives a waiver, it will have to compete with two huge, well-established firms in the area, each with deep finances and considerably better financial and operational standing. As a result, we believe Vodafone Idea's transition from a 'going concern' to a 'investible idea' is still some time away," the brokerage stated.

That being said, Nuvama anticipates Vodafone Idea to raise a total of Rs 45,000 crore in funding, including a Rs 25,000 crore debt issue in Q2 FY25. The firm estimates Vodafone Idea's spending at Rs 40,000 crore spread over the next eight quarters. Tariffs are also expected to increase by 10% in Q2FY25 and Q3FY26.

"Vodafone Idea's management intends to increase tariffs numerous times in the future years to raise ARPU and EBITDA. The company aims to increase its Ebitda to Rs 35,000 crore over the next two to three years, which will enable it meet its debt obligations. We developed the following scenarios based on the ARPU growth required to achieve the targeted EBITDA levels," it stated.

Vodafone Idea, according to Nuvama, requires a renunciation of these liabilities. Given that the case is still pending, it is difficult to comment on the potential of this occurring. 

"Another moratorium, like the last one, will just delay the inevitable and not provide a long-term solution. We have long argued that for VIL to survive and grow, all three of the following events must occur: capital infusion, tariff increases, and liability waivers. The possibility of the third one remains elusive at this moment. "We developed the following scenarios for VIL's potential reduction in AGR liability," it stated.

The stock was trading 4.38% down at Rs 13.76. On Monday, the telecom operator's capital raising committee approved the allotment of 16,36,36,36,363 shares with a face value of Rs 10 apiece for Rs 11 per share.