Vodafone Idea FPO opens today: Should you subscribe to India's largest follow-on offer?

Vodafone Idea's Rs 18,000 crore follow-on public offering (FPO) kicked-off for bidding on Thursday, April 18, 2024. The teleom operator is selling its shares in the price band of Rs 10-11 apiece and the lot size for India's largest ever follow-on offer is set at 1,298 equity shares. Investors can subscribe to the issue until Monday, April 22.

Brokerage firms, tracking the issue, are mostly positive on the back anticipated tariff hikes, growth in average revenue per user (ARPU), capacity expansion and growth reduction plans. Analysts believe that the fundraising will help the company in its financial crunch. However, they believe that growth in user base and execution of revival plans will be key things to watch out.

Vodafone Idea, Incorporated in March 1995, is a telecommunications player, which provides voice, data, and value-added services across 2G, 3G, and 4G technologies, such as short messaging and digital services for enterprises and consumers.

Vodafone Idea ranks as the third-largest telecommunications service provider in India based on its subscriber base. The company is currently raising funds to establish new 4G sites and expand its existing 4G infrastructure. This presents Vodafone with a valuable opportunity to capitalize on this segment and enhance its ARPU, said Canara Bank Securities.

"The competitive landscape poses a potential threat to Vodafone's market share and penetration in the future. From a valuation perspective, Vi's EV/Ebitda ratio for FY2023 stands at 18 times, above the industry average of approximately 15-16 times for the same period. We recommend Vi for the long-term considering their capacity expansion strategy, giving potential for ARPU expansion," it said.

The company had over 22.3 crore subscribers and a subscriber market share of 19.3 per cent as of December 31, 2023. Its network carried 401 billion voice minutes and 6,004 billion MB of data. Vodafone offers mobile and fixed services to more than 30 crore customers in 17 countries.

Vodafone Idea has continued to incur significant losses due to high finance costs, depreciation and amortization expenses. The company has also faced challenges related to regulatory disputes, such as the one-time spectrum charges and AGR dues, which have impacted its financial performance, said Arihant Capital Markets in its note.

"Going forward, the company's ability to improve its operational efficiency, effectively manage its debt obligations and resolve regulatory issues will be crucial in determining its financial sustainability and future growth prospects. At the upper price band of Rs 11 the issue is valued at EV/Ebitda of 16.28 times based on FY23 Ebitda of Rs 16.817 crore," it added with a 'subscribe' rating.

Shares of Vodafone Idea commanded a grey market premium of Rs 1.70 per share ahead of listing, suggesting gains of around 15.45 per cent to the investors from the FPO price. However, the stock rose more than 4.33 per cent to Rs 13.48 during the trading session on Thursday.

IIFL Securities upgraded Vodafone Idea to 'add' with target price of Rs 14, recommending subscribing to the FPO. "Equity infusion in Vodafone, to be likely followed by debt raising, is likely to result in Rs 45,000 crore funding and should enable Vi to narrow the 4G coverage/capacity gap with peers. This would not only arrest sub losses but also enable faster upgrade of 2G users to 4G," it said.

The telecom operator has raised Rs 5,400 crore from several institutional investors via an anchor book. A total of 74 institutional investors made investments in the company, including GQG Partners, Morgan Stanley, Fidelity, FIAM Group, UBS Fund Management, The Master Trust Bank of Japan, and HDFC Mutual Fund.

Vodafone Idea's FPO is a fresh issue of shares, meaning the company will raise new capital. The purpose of this fundraising is to bolster VI's network infrastructure, deploying new 4G and 5G towers, enhancing network coverage and competing effectively with peers. Additionally, some of the proceeds will be directed toward debt reduction, improving its financial health, said Swasitika Investmart.

"However, its financial situation presents challenges for potential investors. Unlike its competitors, VI has experienced a consistent user base decline. A potential financial crunch looms in 2026 when significant spectrum and adjusted gross revenue dues of up to $4 billion become payable. Therefore, investors should carefully consider these factors, while participating in the issue," it added.

Vodafone Idea has reserved 50 per cent of the net offer for the qualified institutional investors (QIBs), while non-institutional investors (NIIs) will get 15 per cent of shares. Retail investors will get 35 per cent of the net offer.

Axis Capital, Jefferies India and SBI Capital Markets are the book running lead managers of the Vodafone FPO, while Link Intime India is the registrar for the issue. The FPO shares will be listed at the bourses, both BSE and NSE, on Thursday, April 25, 2024.