Synopsis: Motilal Oswal and CITI have turned positive after positive developments on Vodafone Idea as the Supreme Court has directed the government to reassess the AGR issue. If any relief is provided, then it would be a significant rescue to Voadone’s financial burdens.
The shares of India’s third-largest telecom operator of India are in focus after multiple brokerages reacted positively to the news regarding the apex court’s decision on AGR dues. In this article, we will dive more into the details.
With a market capitalization of Rs 1,06,501 crore, the shares of Vodafone Idea Ltd are currently trading at Rs 9.76 per share, up 2.3 percent from its previous day’s closing price of Rs 9.99 per share. Over the past five years, the stock has delivered a poor return of 11 percent, underperforming NIFTY 50’s return of 122 percent.
Analyst Comments
Leading domestic brokerage house, Motilal Oswal, has changed its stance to Neutral from Reduce earlier, and has significantly raised its target price by 54 percent to Rs 10 per share, from an earlier fixed Rs 6.5.
The brokerage cited positive development after the Supreme Court decided to allow the government to reassess the adjusted gross revenue (AGR) issue. This court decision came as a financial respite for the telecom company.
CITI also set a target price of Rs 10 and cited that this decision by the apex body could significantly benefit the telecom major. Furthermore, the AGR relief could provide banks with the confidence to extend debt to the company in the future.
Since the government is now the largest shareholder with 49 percen ownership in Vi, the initiative is interpreted as a move to keep the company alive and thus ensure the services of 20 crore users are not disrupted.
This would help Vi to lower its debt load, raise cash, and execute its capital expenditure plans worth Rs 50,000–55,000 crore. On the other hand, they also point out that Vi is still highly leveraged and that the government’s response in terms of action is awaited.
If there is any relaxation in spectrum charges, it will be a win-win situation for the whole telecom sector; however, to what extent Bharti Airtel will be supported remains to be seen.
So what can the government do about this issue?
To ease the financial burden of Vodafone Idea, the government could do multiple things.
It is possible that these could feature the extension of the AGR repayment deadline after March 2031, half of the interest being waived, and the entirety of the penalties and the interest on the penalties, as well as the revision of the calculation of the total amounts due.
The reduction of Vi’s total liability, the improvement of its cash flow, and the granting of a certain flexibility to it to focus on network expansion and long-term growth would result from such interventions.
It should be noted that the decision regarding the AGR relief by the government is still pending, and there has been no official confirmation. Vodafone Idea is quite popular among users and has a good network coverage. In case the government offers a significant relief, Vi can take the benefit of the better cash flow situation to extend its 4G network and quickly launch 5G in more areas. This will enable Vi to challenge Jio and Airtel on a level playing field and regain the trust of the market.
Written by Satyajeet Mukherjee
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