Brokerage firm Jefferies has initiated coverage on telecom service provider Vodafone Idea Ltd. on Thursday, September 10, calling it a "high-beta turnaround opportunity" in the Indian telecom sector. The brokerage has ascribed a price target of ₹20 on the stock, which implies an upside potential of 30% from current levels and is also the highest on the street among the 22 analysts that have coverage on it.
This is also only the fourth "buy" recommendation on Vodafone Idea, where majority analysts having a "sell" rating on the stock. Jefferies expects the ongoing subscriber stabilization for Vodafone Idea to support its revenue to grow at a Compounded Annual Growth Rate of 11% over financial year 2026-2029.
This, coupled with strong operating leverage will also aid a 25% cash EBITDA CAGR during the same period and a sharp improvement in its Return on Invested Capital through financial year 2031. Vodafone Idea should deliver incremental EBITDA margins of around 50% during the financial year 2026-2029 period, which is lower than the 60%-plus margins that telecom companies see, considering the accelerated network rollouts during this period, according to the Jefferies note.
The brokerage expects margins to improve above 60% after financial year 2030, once the network rollout normalizes. While raising ₹25,000 in debt will be sufficient for Vodafone Idea to tide over the next couple of years, it will need fresh equity infusion worth ₹16,000 crore in financial year 2030, which will also trigger conversion of spectrum liabilities worth ₹15,300 crore into equity by the government.
Jefferies believes this should be sufficient to cover the cashflow shortfall over financial year 2030-2034. Given that the company has already raised equity worth ₹44,700 crore since 2019, raising ₹16,000 crore additional, amidst improving operating cash flows and continued support from the government would not be difficult, Jefferies wrote in its note.
Although Vodafone Idea is the most leveraged beneficiary of the tariff hikes, Jefferies believes every 10% increase in tariffs will drive an equity value upside of around 34% for the telecom company. The brokerage has cited execution and funding risks as some of the barriers to its investment thesis.10 out of the 22 analysts still have a "sell" rating on Vodafone Idea, while eight have a "hold" rating.
The consensus estimates of price targets implies a downside potential of 20%. Shares of Vodafone Idea ended 0.7% higher on Wednesday at ₹15.53. The stock has risen 20% in the last one month, taking its year-to-date gains to 34%.