Vodafone Idea’s stock suffered a significant decline on Friday, falling over 14% after foreign brokerage Goldman Sachs issued a ‘sell’ recommendation with a target price 83% lower than its Thursday closing price.
Goldman Sachs reiterated its ‘Sell’ rating on the stock, raising the target price marginally to Rs 2.5 per share from Rs 2.2, which led to a 14.44% drop in the company’s share price on the BSE, reaching as low as Rs 12.91.
At 12:20 pm, the share price was still trading more than 10% in the red. The new target price represents an 83% decrease from Thursday’s closing price.
Goldman Sachs cited several reasons for its bearish outlook, expressing concerns about Vodafone Idea’s ability to compete effectively in the Indian telecom market.
The company’s recent capital raise, while a positive development, was deemed insufficient to halt its ongoing erosion of market share.
“We expect Vodafone Idea to lose another 300 basis points of market share over the next 3-4 years,” Goldman Sachs stated in its report.
The telco’s revenue market share (RMS) fell to an all-time low of 15% in the fiscal first quarter, following market share losses in 16 out of 22 circles.
Concerns over cash flow and market position
One of the key issues highlighted by Goldman Sachs is Vodafone Idea’s struggle to achieve sustainable free cash flow.
The brokerage estimated that for the company to become cash flow neutral, its Average Revenue Per User (ARPU) would need to rise significantly, to between Rs 200 and Rs 270.
“Even with optimistic assumptions, the company faces an uphill battle,” Goldman Sachs noted.
Furthermore, the firm questioned Vodafone Idea’s premium valuation compared to competitors Bharti Airtel and Jio.
Given Vodafone Idea’s weaker growth prospects, margin returns, and balance sheet, Goldman Sachs sees little justification for the stock’s current premium.
Interestingly, Goldman Sachs had previously invested in Vodafone Idea’s FPO in April this year.
Indus Towers also affected
The negative sentiment surrounding Vodafone Idea also impacted Indus Towers, whose shares fell over 6% after Goldman Sachs downgraded its rating from ‘Neutral’ to ‘Sell’.
Despite raising the target price to Rs 350 from Rs 220, Goldman Sachs expressed concerns about Indus Towers’ growth prospects, noting a disconnect between its fundamentals and current valuations.
“The recent re-rating of Indus Towers is overdone,” Goldman Sachs remarked.
Indus Towers has performed strongly in recent months, with its stock surging over 75% in the past six months.
However, Goldman Sachs warned that the company’s medium- and long-term growth visibility remains limited, especially if Vodafone Idea, one of its key clients, fails to stabilise its financial position.
Citi takes an optimistic view
In contrast, Citi has maintained a more optimistic outlook, holding a ‘Buy’ rating with a target price of Rs 22 per share.
Citi’s positive stance is based on the potentially favourable outcome of Vodafone Idea’s AGR curative petition. If the Supreme Court agrees to hear it, the reduction in the company’s AGR debt burden could be significant.
Citi estimates that such a reduction could potentially add Rs 4-5 per share, representing a considerable boost to the stock’s value.
Market outlook remains grim
The overall outlook for both Vodafone Idea and Indus Towers remains cautious, with Goldman Sachs maintaining a wary stance.
For Vodafone Idea, the challenges of improving cash flow, maintaining market share, and justifying its current valuation appear substantial.
As for Indus Towers, the company’s reliance on Vodafone Idea and the recent surge in its stock price could pose risks for investors.
By mid-morning, Vodafone Idea’s stock was still trading significantly lower, down 12.19% at Rs 13.25 on the BSE, reflecting investor concerns and the gloomy forecast from Goldman Sachs.
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