Is it worth investing in the upcoming fpo | Is VI’s upcoming FPO worth investing in? Achi-News

In the Indian telecom sector, two companies – Bharti Airtel and Reliance Jio have maintained a stronghold for a long time. Meanwhile, Vodafone Idea is trying to maintain its relevance. For this, Vodafone Idea has planned a capital investment. But will this capital investment be enough for the company? Will this lead to a transformation for the company?

For existing Vi shareholders, and for investors looking to get in via FPO, what would be the right strategy?

Crisis in VI
Vodafone Idea, which has been facing a debt crisis for the longest time, has planned to raise Rs 45,000 crore to improve its financial position. This amount will be raised through a combination of equity and debt.

First, Rs 20,000 crore will be raised through equity by the end of June. Later, another 25,000 million rupees will be raised from the creditors, which was approved by the company’s board of directors.

The equity financing was initiated by the promoter Aditya Birla Group, which will invest Rs 2,075 crore through the issue of preference shares. Shares will be issued to Aditya Birla Group company Oriana Investments at a price of Rs 14.87.

But, the FPO was approved at a discount of 26-33 percent from this price, i.e. in a price range of Rs 10-11. This issue, which will be opened from April 18 By 22, will be the largest FPO in the country. But first, let’s understand all the issues that bother the company?

Vodafone Idea or Vi was formed in 2018, when Aditya Birla Group’s Idea Cellular and the Indian unit of Britain’s Vodafone Plc merged. But later, the central government became the largest shareholder of this company. This is because after the merger, the financial situation of the newly established entity worsened.

Vodafone Plc has written off all its investments in its Indian unit, placing it in the bad debt category. It also said it would not make further equity investments in this company.

Due to this, Vi has yet to roll out 5G, while Jio has already crossed the 10 crore mark and Airtel has crossed 7.5 million 5G subscribers by the end of March, 24.

So why did Vi’s condition get worse?

From 2007 to 2016, as fast as the number of subscribers increased, the competition in the sector also increased at the same breakneck pace. The situation worsened further after the launch of Jio in 2016, as the price war had a significant negative impact on companies’ ARPU, i.e. average revenue per user.

The new company formed after the merger of Vodafone and Idea, with their different operating methods, increasing competition, the need for additional capital to obtain new technology and payments to the government, could not cope. The situation is that by the end of December 2023, the total debt carried by the company was an incredible 2.14 million shekels.

With a consistent decrease in customers, the company has been recording losses for several consecutive quarters.

Now let’s understand whether the funds of the promoter and the FPO can solve the difficulties of the company? To stay in the telecom race, the company will not only need to strengthen its 4G network, but it will also need to start the 5G rollout at the earliest, which requires huge capital.

Even if the company manages to raise the entire amount of Rs 45,000 crore, most of it will go towards clearing mandatory debts to the government and major suppliers like Indus Towers.

Goldman Sachs recently said that if no rate hike happens, the company will need fresh capital of Rs. 65,000-83,000 million over the next two years to compete with Jio and Airtel.

On the other hand, Nomura believes that with a large capital injection in the short term, the company will be able to eliminate its debts, activate 5G, and also improve its operational position by curbing the decline in the number of subscribers, which will be a big positive for it.

But still, the company will not be able to fully overcome difficulty, because achieving stability after the launch of 5G will take time, which is very crucial for improving the company’s position.

In fact, CLSA had lowered its target price on the stock to Rs 5, ahead of the FPO announcement. Now the question is whether existing and new investors of Vi should put money in FPO or not?

According to Motilal Oswal, the upside potential for shareholders appears to be limited due to the high cash requirement for interest payments, although he has factored in the potential benefits from higher ARPU. With limited operating profits, servicing the interest payments without external financing will be challenging.

Rajesh Agrawal, HoR at AUM Capital, believes that existing investors can hold their position, but should not invest in FPOs, meaning investors are not advised to go for an average.

Had the company raised funds through a QIP, there would have been upside potential in the stock, as this would have given an indication of institutional investors’ confidence in the company.

It is difficult to say whether the new capital injection will bring about a change in the company. But with the FPO at a big discount, there is almost no expectation of a significant increase in the stock. Therefore, it is better to avoid the stock until there is a significant financial improvement.