Vi Stocks Turn Volatile, Surge 18% on Friday

Analysts suggest switching to rival mobile telephony company stocks for better future appreciation

Vi Stocks Turn Volatile, Surge 18% on Friday
Vi Stocks Turn Volatile, Surge 18% on Friday
Yagnesh Kansara - 06 August 2021

The mobile telephony major Vodafone Idea (Vi) stock is in the news for two major developments that have taken place in the last couple of days. The first one is with respect to the offer from its non-executive chairman Kumar Mangalam Birla to step down one and hand over the promoter’s stake to the government. The second one is related to government’s move to introduce a bill to scrap retrospective taxation. Because of these two developments that can impact the future growth prospects of the mobile-cellular company, existing shareholders are in a state of confusion and are unable to take an informed decision as to whether to continue with the stock or make an exit.

Earlier this week, Mr Birla’s offer to step down and offer his stake to the government and Vodafone Group Plc ruled out any further equity infusion in its debt-ridden telecom joint venture in India. This was seen as a major setback for the stock price. In the absence of promoters, the debt-ridden company will be deprived of any fresh funds for expansion. The company operates in a sector which is highly capital-intensive.

In this regard, Piyush Pandey of YES securities said, “It has become very difficult for Vodafone Idea to service its huge net debt at 10x Net Debt/ EBITDA, in this pricing environment where tariffs are much below sustainable level. The current state of company’s financials (loss making), it would be difficult to raise money from other institutional investors. The options are quite limited for the company and takeover by the government is likely scenario to keep it as going concern entity.”

In the absence of the capital needed to upgrade and maintain its mobile telephony network, the company has suffered massive losses on the subscriber front. A majority of its earning goes in debt servicing, which is 10 times its earnings before interest, depreciation and amortisation (EBIDTA).

Vodafone Idea’s setback and loss in number of subscribers has proved to be blessings for its rival operators Bharti Airtel and Reliance Jio.

On Thursday, the union government proposed to introduce a bill seeking to scrap the provisions of retrospective taxation in the Income Tax rules. This Bill proposes to do away with the contentious retrospective tax demand provisions. The move will provide relief to Vodafone and Cairn Energy that were embroiled in a tax tussle with the Indian government. The Bill would withdraw the retrospective amendments to the Income Tax Act that had raised demands on Vodafone, Cairn and some others, indicating a move to attract foreign investments.

Kumar Mangalam Vijay, Partner, J Sagar Associates said, “This is indeed a very pragmatic step by the Government and should help it contain the widespread litigation in cases similar to Vodafone and Cairn. A worthy battle to lose.”

This may be a positive development for the Vodafone Idea stock. But analysts feel this development will prove to be short-lived as the company’s financials are really in bad shape. It would be better to switch to rival mobile telephony company stocks for better future appreciation, they added.

Vi shares surged 18 per cent to Rs 7.04 on the BSE in the intra-day trade on Friday, a day after the government introduced a Bill in Parliament to nullify the provision of retrospective tax in the Income Tax Act. With today’s gain, the stock of the telecom services has bounced back 55 per cent from Thursday's intra-day low of Rs 4.55 on the BSE.

In the morning trades, Vi stocks were trading 16 per cent higher at Rs 6.88, as compared to a 0.04 per cent rise in the S&P BSE Sensex. A combined 242 million equity shares had changed hands on the counter on the NSE and BSE till the time of writing of this report. The stock trades in the futures & option (F&O) segment, which has no circuit limits.

The stocks of Vi had corrected 45 per cent in the past three trading days and hit a two-year low on Thursday in the intra-day trade. Against this, Bharati Airtel gained 1.49 per cent to close at Rs 608 on BSE.

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