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Global investment banking firm Jefferies has outlined sharply divergent scenarios for Vodafone Idea, projecting a potential 143% rally from current levels in its bull case and a 25% decline in its bear case.
In its base case, Jefferies has cut its target price to Rs 16 from Rs 20, while retaining an upside potential of 34% from current levels. The stock has corrected 23% despite improving subscriber trends. VIL's ongoing network rollouts, along with tariff hikes, should position VIL well to deliver 11% and 25% CAGRs in revenue and EBITDA over FY26-29E.
Over the past three months, Vodafone Idea's active mobile subscriber base, excluding M2M, has stabilised, with the average monthly decline narrowing to 0.6 million from 1 million during the preceding two years. This improvement has been supported by a 39% increase in broadband base stations and a 14% expansion in network sites over the past two years.
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1.)Network additions to boost subscriber base
Jefferies expects Vodafone Idea's network sites to expand by 26% to 2,61,000 over FY26-29E. The expansion should boost gross subscriber additions, which are directly correlated with network size, while helping reduce churn through an improved network experience. “Over FY27-29E, we expect VIL's consumer subscriber base to grow by 6m, which in turn should support better translation of tariff hikes into revenues,” the brokerage said.
2.)Highest leverage to tariff hikes
Jefferies estimates that every 10% tariff hike would drive a 17% increase in Vodafone Idea's cash EBITDA. The telecom operator also has an enterprise value-to-market capitalisation ratio of 2.2x, meaning every unit increase in enterprise value translates into a 2.2x increase in equity value. Consequently, a 10% tariff hike could drive a 38% increase in Vodafone Idea's market capitalisation.
3.)Attractively priced
Vodafone Idea is trading at 21x cash EV/EBITDA, below its five-year average valuation. Jefferies expects the multiple to remain elevated until EBITDA growth exceeds 25% and cash EBITDA margins reach more than 40%, compared with Bharti's margins of over 50%. Based on its estimates, these milestones are likely to be achieved by FY32-33. Assuming a 12x EV/EBITDA multiple on FY33 cash EBITDA, the stock offers a 16% IRR from its current market price through March 2032.
Over FY26-29E, Jefferies estimates that Vodafone Idea will deliver revenue and cash EBITDA CAGRs of 11% and 25%, respectively. Assuming incremental cash EBITDA margins of 45-55% and cumulative tariff hikes of 0-25% between FY27 and FY29, cash EBITDA could range from Rs 147 billion to Rs 224 billion, implying EBITDA growth of 20-45%.
Applying an EV/EBITDA multiple range of 18-22x, against the current multiple of 21x, Jefferies estimates Vodafone Idea's fair value at Rs 9-29 per share. This translates into a potential downside of 25% and upside of 143%, pointing to a favourable risk-reward profile, in the brokerage's view.
The stock has fallen 10% over the past month and sits on a 5% gain on a year-to-date basis.
Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.
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