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Vodafone Idea rights issue: Analysts say mouth-watering deal for investors

The board of Vodafone Idea approved the rights issue plan on Wednesday.

, ETMarkets.com|
Updated: Mar 20, 2019, 03.27 PM IST
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"Our outlook for the sector is stable and we think average revenue per user levels will rise from here on,” he added.
NEW DELHI: After Bharti Airtel, Vodafone Idea has also announced a rights issue to raise some Rs 25,000 crore to take on the stiff competition.

The board of India’s largest telecom operator by subscriber base, Vodafone Idea, approved the rights issue plan on Wednesday. It said the fund raising is aimed at strengthening the company’s countrywide 4G coverage and fighting competition from Bharti Airtel and Reliance Jio Infocomm.

At first glance, it looks a large sum, capable of boosting the company's finance to a large extent, help it pare debt of around $15-16 billion and expand the business in the face of cut-throat competition.

But how effective will this fund raising be for the company? Will this fund raising mean end of the problem or just a lifeline for the next few years?

Vodafone Idea is also likely to raise about Rs 20,000 crore from its proposed stake sale in mobile tower firm Indus Tower and monetisation of optical fibre assets. This, along with the Rs 25,000 crore from the rights issue will be a substantial fund for the company to pare debt.

Analysts said the move is positive for the company, considering the fact that leverage is relatively high for the industry, which not only needs to invest in the quality of services but also prepare for future technologies, including 5G.

“Equity infusion is important and necessary, because it sends out a very clear signal in terms of the intent and seriousness of the promoters,” said Rajan Mathews, Director General of Cellular Operators Association of India (COAI) in a chat with ET Now.

Nitin Soni, Director- Corporates at Fitch Ratings, said the move is a step in the right direction. “Their Ebitda has declined persistently and they have about $650-700 million of annualised Ebitda on a consolidated basis. So it was a necessity for them to do this rights issue to reduce debt,” he said.

"Our outlook for the sector is stable and we think average revenue per user levels will rise from here on,” he added.

Analysts pointed out that the rights issue is being offered at a substantially lower price when the current market price of the stock is already significantly low against what it was two-three years ago. The stock is now available near an all-time low.

Normally, a rights issue is priced at a discount to the current market price. “Considering the prevailing stress in the sector and the need for financial muscle to remain competitive, the company might have made it attractive for investors. Another reason could be to avoid purchase of residual shares by the promoter group. Overall, it is a good investment opportunity for long-term investors,” said Rajnath Yadav, Senior Research Analyst of Choice Broking.

The concern over a discount on the issue does not pose a serious risk, said Sameer Kalra, Founder at Target Investing. “The issue price will be cheaper as it was even in the case of Bharti Airtel. The face value of Rs 10 is on good parameters," he pointed out.

"What is more important for these companies is to ensure that their debt levels remain under control and they have the capital to strengthen and expand their businesses,” he said.

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