Vodafone Idea (VI) delivered in-line Q4FY22 results with 5.4% q-o-q revenue growth led by a 7.5% spurt in ARPU and 3.4mn erosion in subscriber base (versus 5.8mn decline in Q3FY22). While VI’s operating performance is stable, the fundamental issue of high financial leverage can be addressed only by a significant tariff hike and equity infusion. Access to capital is crucial considering upcoming 5G spectrum auctions, but the company’s ability to invest in network is constrained by high debt and low cash Ebitda. Promoters have infused Rs 45 bn, but that is not sufficient. We await the next capital-raise.  In absence of any visibility of a major tariff hike and challenges in raising capital, we retain ‘Reduce’ with a TP of Rs 7.

Operating performance stable: VI’s revenue grew 5.4% q-o-q to Rs 102.4 bn. APRU increased to Rs 124, from Rs 115. The company added 1.1mn 4G subscribers in the quarter. Overall margins increased 610bp to 45.4%. There was Rs 1.5 bn one-off in the network & IT cost, resulting in adjusted Ebitda of Rs 45 bn. Cash on books now stands at Rs 14.6 bn, down from Rs 15 bn in Q3 while net debt declined to Rs 1.96 trn.

Awaiting capital-raise and tariff hike:  We believe VI has a very small window to raise capital and prepare itself for 5G considering spectrum auctions are scheduled for H2FY23. Considering VI has been lagging its peers in terms of network investments, timely capital-raise and network investment will be crucial for long-term sustainability of the business. Besides, ARPU needs to double for VI over the next 3-4 years for it to meet its current debt obligations.

Outlook: Leverage remains high – The company also needs to ensure it successfully upgrades its 2G subscriber base to 4G and retains overall subscriber base so that ARPU growth translates to revenue growth. The stock is trading at 11x FY23e EV/Ebitda. Maintain ‘REDUCE/SU’.