Vodafone Idea Has 83% Downside, Says Goldman Sachs — Here's Why

Goldman Sachs' target price of Rs 2.5 apiece for Vodafone Idea Ltd. implies a 83% downside to current market price. The brokerage maintains its 'sell' rating on the stock. While the brokerage believes that the recent capital raise is positive, it won't stop the share erosion.

Goldman Sachs points out that to maintain a neutral cash flow, the average revenue per user or ARPU, a key metric used to track the health of telecom companies, would have to rise to Rs 200-270 versus the current levels of Rs 146.

The brokerage forecasts another 300 basis points loss in market share in the next three to four years. According to revenue, Vodafone Idea's market share stands at 17% as of fiscal 2024.

Furthermore, Vodafone Idea has a large AGR, or adjusted gross revenues, and spectrum dues starting in fiscal 2026. Hence, Goldman Sachs expects free cash flow to be negative at least till fiscal 2031.

One possibility is that the government could turn some dues into equity. But Goldman Sachs expects that in such a case, the balance sheet will still remain stretched.

Goldman Sachs believes that there is a direct correlation between the capital expenditure of telecom companies and their market share, though with some lag.

In terms of capital expenditure, Vodafone Idea's market share stands at 8% as of fiscal 2024, versus 49% for Reliance Jio and 43% for Bharti Airtel.

For Vodafone Idea, even if no AGR dues or spectrum payments happen until fiscal 2027, the cumulative capital expenditure by the company comes at $7-8 billion, which is 60% lower than Bharti or Jio.

Vodafone Idea has guided a capital expenditure of $6-6.6 billion over the next three years; the brokerage house believes that the translation of this into market share would be restricted. In terms of capex, Vodafone Idea's market share would remain at 10%, while revenue would continue to decline.

Goldman Sachs have chalked out a blue sky scenario wherein the AGR dues would reduce by 65%, there would be consistent tariff increase and no near term government repayment.

In such a case, the target price for the company may be set at Rs 19 apiece, implying a 26% upside from current levels, versus 83% downside in the base case.

On valuations, the company trades at 24-times its fiscal 2026 EV/Ebitda (Enterprise value/Earnings before interest, tax, depreciation and amortization), which is at a sharp premium to Bharti Airtel's 12 times.

While the stock has moved up by 33% in last one year, the returns are largely muted in last six months.

Out of the 22 analysts tracking the company, four have a 'buy' call, five recommend a 'hold', and 13 suggest a 'sell' on the stock, according to Bloomberg. The consensus target price of these analysts implies a potential downside of 11.2%.