Vodafone Idea shares a high-beta turnaround play, says Jefferies; here's target price

Vodafone Idea Ltd (VIL) shares are in focus on Thursday as Jefferies reinitiated coverage on the telecom operator with a 'Buy' rating, saying VIL is a high-beta turnaround story, supported by accelerating revenue growth, operating leverage, and tariff-led earnings expansion.

Jefferies said strong cash Ebitda margin expansion from depressed levels of 21 per cent will not only drive a 25 per cent growth in cash Ebitda compounded annually over FY26-31, but will also drive an return on invested capital (ROIC) inflection from negative territory today to double digits by FY32.

"VIL is the most leveraged beneficiary of tariff hikes, with every 10 per cent increase potentially driving 34 per cent equity value upside. Our Rs 20 target price is based on 23 times EV/Cash Ebitda - in line with its 5-year average. Our investment thesis hinges on future tariff hikes and a required Rs 16,000 crore equity raise by FY30," Jefferies said.

The scrip settled at Rs 15.52 apiece on Wednesday. Jefferies’ target was higher than the 12-month Bloomberg consensus target of Rs 12.43, based on 20 analyst estimates, days after HSBC suggested a ‘Reduce’ rating with a target of Rs 8.25 apiece.

The foreign brokerage expects subscriber stabilisation to support an 11 per cent revenue CAGR over FY26-29 which along with strong operating leverage will drive a 25 per cent cash Ebitda CAGR and a sharp ROIC inflection through FY31.

VIL's premium multiples should sustain during the turnaround, it said adding that VIL's network investments are already driving down churn and will likely drive down churn further and also boost gross subscriber additions, which in turn should drive a turnaround in subscriber additions from FY28.

This, Jefferies said, should improve the translation of tariff hikes into revenue growth for VIL. "Moreover, VIL's lower share data subscribers offers higher scope for subscriber premiumization. We forecast 11 per cent revenue CAGR over FY26-29, driven by subscriber stabilization, premiumization and tariff-led ARPU growth, helping sustain revenue market share," Jefferies said.

While the Rs 25,000 crore debt raise will be sufficient to tide over FY27-29, VIL will need Rs 16,000 crore fresh equity infusion in FY30 which will also trigger conversion of spectrum liabilities worth Rs 15,300 crore to equity by the government, Jefferies said.

"This shall be sufficient to cover the cashflow shortfall over FY30-34. Given that VIL has raised equity of Rs 44,700 crore since 2019, we believe raising another Rs 16,000 crore equity amidst improving operating cashflows and continued government support may not be difficult," Jefferies said.