91% upside potential! Nomura is bullish on telecom stock Vodafone Idea post Q2 results, retains ’buy’ call

Following better-than-expected September quarter results, global brokerage firm Nomura India has reaffirmed its 'Buy' rating on Vodafone Idea, setting a target price of ₹14. This suggests a potential 91 percent upside from the stock's closing price of ₹7.34 on Friday.

Nomura anticipates that the pace of subscriber losses for the telco will decelerate in FY26, projecting a return to modest growth in FY27, supported by continued investments in 4G network expansion and the roll-out of 5G services.

Growth and Ebitda Projections

Nomura expects Vodafone Idea’s Ebitda to grow at a compound annual rate of 14 percent from FY24 to FY27. However, it highlighted that the positive outlook is contingent on the telecom company securing necessary debt funding soon. This financial boost is crucial for Vodafone Idea to invest adequately in its network and return to a trajectory of subscriber growth.

Despite the optimistic stance, Nomura's current target price is slightly lower than its previous projection of ₹15, attributed to a reduction in earnings estimates and a rollover to December 2026 earnings expectations.

Q2 Earnings Performance

Vodafone Idea's financials for the September quarter showed a narrowing of losses to ₹7,175 crore from ₹8,746 crore in the same period the previous year. Revenue edged higher to ₹10,932 crore from ₹10,716 crore year-on-year. However, the company continues to advocate for further industry-wide tariff rationalization to adequately cover capital expenditures.

The Average Revenue Per User (ARPU), a critical measure of profitability, increased to ₹156 from ₹142 a year earlier and ₹146 in the previous quarter. This improvement was fueled by the tariff hikes implemented in June, with the full impact reflected starting from the September quarter. Vodafone Idea's subscriber base was reported at 205 million as of September, down from 219.8 million a year ago, with 126 million being 4G users. The decline in the subscriber base was attributed mainly to SIM consolidation in response to the tariff adjustments.

“The impact of recent tariff interventions can be seen in improved ARPUs and revenue for the quarter, though the full impact will be reflected over the next couple of quarters. Further tariff rationalization is needed for the industry to fully cover its cost of capital,” noted Vodafone Idea CEO Akshaya Moondra.

Investment Rationale and Strategic Outlook

Nomura India outlined key takeaways from Vodafone Idea’s post-results conference call, noting that the company primarily lost subscribers to BSNL following the tariff hikes in July 2024. However, the management indicated that this trend began to reverse starting in August. The company expects the full benefits of the recent tariff hikes to be observed over the coming two quarters.

Vodafone Idea aims to initiate its 5G rollout in select regions by the fourth quarter of FY25 and has plans to extend its 4G network coverage to reach 120 crore people by September 2025. In the September quarter, the company added 42,000 4G sites while decommissioning 19,700 3G sites. The company’s planned capital expenditure is ₹8,000 crore for the second half of FY25 and between ₹50,000 crore and ₹55,000 crore over the next three years.

Nomura has revised its Ebitda estimates, reducing the FY25 forecast by 3 percent and FY26/27 projections by 5 percent and 4 percent, respectively, due to expectations of a lower subscriber base. However, the firm anticipates ARPU to grow by 12 percent in FY26-27, with ARPU projected to rise from ₹161 in FY25 to ₹182 in FY26 and ₹205 in FY27.

These strategic moves and financial projections illustrate Vodafone Idea's concerted efforts to stabilize its operations and enhance long-term profitability, though success remains closely tied to securing necessary funding and executing its expansion plans effectively.

Stock Price Trend

The telecom stock has shed 49 percent in the last 1 year over 54 percent in 2024 YTD. It has crashed almost 10 percent in November till date, extending losses for the fourth straight month. It tanked 21.6 percent in October, 33.7 percent in September, 3.8 percent in August and 9 percent in July.

Currently trading at ₹7.34 (as of Thursday's close), the scrip is almost 62 percent away from its 52-week high of ₹19.15, hit in June this year. Meanwhile, it hit its 52-week low of ₹7.32 in the previous session, November 14, 2024.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.