Should you buy Vodafone Idea shares after 20% fall? UBS shares new target price

Vodafone Idea shares fell 20% after the Supreme Court on Thursday dismissed the company's curative petition, which sought a re-computation of Adjusted Gross Revenue (AGR) dues.

In Short

• Vodafone Idea shares fall 20% after Supreme Court setback
• Supreme Court dismisses Vodafone Idea's AGR dues plea
• Nomura upgrades Vodafone Idea to 'Buy', targets Rs 15

Shares of Vodafone Idea Ltd (VIL) took a sharp hit on Dalal Street, falling close to 20% after a legal setback.

The Supreme Court on Thursday dismissed the company’s curative petition, which sought a re-computation of Adjusted Gross Revenue (AGR) dues.

This decision came as a major blow for the company, as it had hoped for some relief regarding its hefty financial liabilities. With the court’s ruling going against the telecom firm, Vodafone Idea’s share price tumbled, prompting many investors to reconsider their positions in the stock.

Why did Vodafone Idea shares fall?

Vodafone Idea, along with other telecom companies, has been embroiled in a long-running legal dispute over AGR dues.

In 2019, the Supreme Court ruled that telecom operators owed billions in dues to the government, based on a broad definition of AGR. Since then, Vodafone Idea has been struggling to cope with the massive financial burden.

On Thursday, the company’s hopes for relief were dashed when the Supreme Court dismissed its request to reconsider the 2019 judgment.

This means Vodafone Idea will have to pay the full amount of AGR dues, estimated at Rs 70,300 crore. The news triggered a steep sell-off, with the stock plunging by 20%.

Following the share price collapse, several brokerages have weighed in on the stock’s prospects. Opinions are divided, with some recommending a cautious approach and others seeing potential buying opportunities.

Nuvama Institutional Equities: ‘Hold’ recommendation

Nuvama Institutional Equities said that the Supreme Court’s decision was a significant blow to Vodafone Idea but added that the stock’s 20% correction already reflects the impact of the increased liability.

Nuvama adjusted its target price to Rs 11.50 from Rs 16.50, factoring in the full AGR dues liability. However, the brokerage reiterated a 'Hold' recommendation, suggesting that investors should keep an eye on key operational metrics like subscriber losses, tariff hikes, and capital expenditure.

"The unfavourable Supreme Court verdict comes as a big setback to VIL. However, the sharp 20% correction in the stock price, more or less captures the value of the incremental liability, over and above what the Street was expecting. Hereafter, the focus shall shift to VIL’s progress on key operational parameters – pace of subscriber loss, tariff hike impact and capex velocity," said Nuvama Institutional Equities.

Nomura India: ‘Buy’ opportunity

Nomura India took a more optimistic view, upgrading its recommendation from ‘Neutral’ to ‘Buy’ with a target price of Rs 15.

According to Nomura, the worst may now be over for Vodafone Idea following the conclusion of the AGR issue. Despite the company’s large debt burden, Nomura believes that government support will enable Vodafone Idea to repair and rebuild its business.

Nomura also highlighted that the outlook for the Indian telecom sector is strong, supported by expected tariff hikes and the potential for 5G monetisation in the coming years.

The brokerage’s estimates, which factor in a 12% increase in average revenue per user (ARPU) and a slowdown in subscriber losses, suggest that Vodafone Idea’s earnings before interest, taxes, depreciation, and amortisation (Ebitda) could grow at a compound annual growth rate (CAGR) of 15% between FY24 and FY27.

"We note that the AGR outcome was a material overhang on VIL, and following the conclusion of this overhang, there is now incremental visibility on the way forward for VIL. Despite its large debt burden (but manageable with government support) in the coming years, VIL will be able to steadily repair and rebuild its business and partake in the robust outlook for the Indian telecom industry — which is underpinned by clarity on significant tariff hikes for the next two years and 5G monetisation," Nomura India said.

UBS: Fair value between Rs 12-24

UBS offered a fair value estimate for Vodafone Idea, suggesting that the stock could be worth between Rs 12 and Rs 24. The brokerage said that while the stock’s current price is slightly below its implied value, there are still risks related to the company’s debt and financial stability.

UBS also mentioned that options such as equity conversion or deferral of payments cannot be ruled out, as Vodafone Idea seeks to stabilise its financial position.

(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)