Is it possible for Vodafone Idea to ring in profits?

Vodafone Idea 's Laapataa profits have grabbed headlines for several years, and its future looks equally bleak. The subscriber count has followed a downward trajectory since FY20. Also, its liabilities have stood at a worrying Rs 2 lakh crore as of FY24. Yet, investor optimism remains unswayed. Its latest FPO, India's largest FPO to date, was subscribed more than six times. Even market experts contributed to the euphoria, with institutional oversubscription hovering at 19 times.

So, are we—and Goldman Sachs, which valued the company's shares 75 per cent lower than its market price at Rs 2.5 per unit—missing a crucial piece of the puzzle? Is this telecom veteran capable of turning the tide and generating profits, and more importantly, creating wealth for investors? Let's find out.

The possibility of profits
Let's be straightforward: In all likelihood, profits will remain elusive for Vodafone Idea in the near future. However, we want to explore, quantitatively, if profits are within the realm of possibility. For that, we'll need to consider some optimistic assumptions.

• The subscriber count will not decline drastically. Between FY20-24, total subscribers fell around seven per cent annually. However, Vodafone's 4G subscribers surged five per cent annually in the same period. The downtrend in its subscriber count was primarily due to declining demand for its 2G services. Based on this, we have assumed that its overall subscriber count will not dip drastically in the near future.
  
• 2G subscribers will switch to 4G. It had around 213 million total subscribers as of FY24, of which around 86 million or 40 per cent were 2G users. We expect around 25 per cent of 2G subscribers to switch to 4G, given that most 2G users have brick phones and cannot avail of 4G networks.
  
• Price hikes will be in line with the industry. Bharti Airtel 's Chairman, Sunil Mittal, has indicated that tariffs across the telecom sector are set to rise 25 per cent in the coming years. We expect Vodafone Idea to implement similar hikes. This would increase its 4G ARPU (Average Revenue Per User)—a key metric in the telecom industry, representing revenue per customer—from Rs 194 to Rs 300. Meanwhile, the ARPU for its 2G services remains low, at Rs 73, and we don't anticipate significant changes here since the entire sector is phasing out 2G.

Given the above assumptions, we arrive at an annual revenue of around Rs 60,000 crore. This figure is based on multiplying the ARPUs for both 2G and 4G users by their respective subscriber counts for FY24. In the telecom industry, costs are generally stable due to high operating leverage, so we assume that Vodafone Idea's costs will remain at current levels.

With these numbers, the company could achieve an EBIT (Earnings Before Interest and Tax) of Rs 13,000 crore, showing that profitability at the operating level is within reach. However, there's more to the story.

Even though operating profits may be achievable, turning this into net profitability is another challenge. In our scenario, Vodafone Idea would still incur a net loss of Rs 12,000 crore before tax due to its massive interest burden—Rs 25,000 crore as of FY24. However, there's a potential silver lining.

In Q1 FY25, its interest costs were lower-than-expected at Rs 5,500 crore, due to equity infusion and debt conversions. If Vodafone Idea continues with such debt-to-equity conversions, its interest costs could decrease further, improving its bottomline.

Profitable is not investible!
Note that despite the possibility of operating profits, we are not presenting an investment case for Vodafone Idea.

First, the company lags far behind its competitors, Bharti Airtel and Reliance Jio , in terms of 5G coverage and capital expenditure. Additionally, any future profitability may depend heavily on continued equity dilution—good for reducing debt, but alarming for shareholders, as it dilutes their stake in the company. Finally, while we've assumed price hikes, there's no guarantee these will materialise to the extent needed. Bharti Airtel and Reliance Jio are already profitable and may not need to raise prices, leaving Vodafone Idea with less flexibility. Also, note that Vodafone Idea just breaks even in our optimistic scenario. However, if our assumptions turn into reality, Bharti Airtel and Reliance Jio would benefit far more, given that they are already profitable and have larger subscriber bases.

In summary, while Vodafone Idea may flirt with profitability in the future, its long-term ability to create wealth for investors remains highly uncertain.

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