Global investment bank Jefferies has upgraded Vodafone Idea (VIL) to a 'Buy' rating, citing a significantly improved risk-reward profile. The brokerage firm projects a potential upside of 143% for VIL shares, estimating a fair value range between Rs 9-29 per share.
This optimistic outlook comes despite a recent 23% correction in Vodafone Idea's stock price. Jefferies maintains that the company's fundamental outlook for FY28 Ebitda remains robust, aligning with consensus estimates. The firm attributes the positive shift to stabilizing subscriber trends and aggressive network expansion efforts by VIL.
Key Drivers for Growth
Jefferies highlights several factors contributing to the favorable risk-reward assessment:
- Subscriber Stabilization: Over the past three months, Vodafone Idea's active mobile subscriber base has shown signs of stabilization, with the average monthly decline reducing significantly to 6 lakh, down from 10 lakh over the previous two years.
- Network Expansion: VIL has boosted its broadband base stations by 39% and increased its overall network sites by 14% in the last two years. This expansion is expected to continue, with sites projected to grow by 26% to 261,000 by FY29.
- Tariff Hikes: Anticipated tariff hikes, combined with network improvements, are expected to drive substantial revenue and Ebitda growth. Jefferies forecasts an 11% compounded annual growth rate (CAGR) in revenue and a 25% CAGR in Ebitda between FY26 and FY29.
The brokerage firm initially suggested a base target of Rs 16 per share, a revision from its earlier Rs 20, still implying a 34% potential upside from current levels. Jefferies notes that VIL shares are currently trading below their five-year average multiples at 21x EV/cash Ebitda, making the valuation attractive.
Impact of Operating Leverage
Vodafone Idea's high operating leverage is a critical component of Jefferies' analysis. With cash Ebitda margins at 20%, every 10% increase in tariffs is estimated to boost cash Ebitda by 17%. Furthermore, VIL's Enterprise Value (EV) to market cap ratio stands at 2.2 times. This means that every unit increase in EV is projected to lead to a 2.2 times jump in equity value for Vodafone Idea. Consequently, a 10% tariff hike could drive an impressive 38% increase in VIL's market capitalization.
Jefferies concludes that the combination of improving operational metrics, strategic network investments, and the potential for tariff increases positions Vodafone Idea for significant future growth, making its shares an attractive 'Buy' despite past corrections.