On Tuesday, Vodafone Idea’s share price surged by an impressive 20%, reaching ₹8.15 per share on the NSE. This surge comes as the Indian government prepares to become the telecom provider’s largest stakeholder by converting a substantial portion of its spectrum dues into equity. The government’s decision to convert ₹36,950 crore of outstanding dues will elevate its stake in Vodafone Idea from 22.6% to a commanding 48.99%.

Government Stake Conversion: Key Details

• Equity Shares Issuance: Vodafone Idea is set to issue 3,695 crore equity shares, each with a face value of ₹10. This issuance will take place after receiving the necessary approvals from regulatory bodies, including the Securities and Exchange Board of India.
• Premium Pricing: The shares will be issued at a price of ₹10 each, representing a 47% premium over the last closing price of ₹6.81.

Impact on Private Stakeholders

With the government increasing its stake, private promoters such as Vodafone Plc and the Aditya Birla Group will see their holdings decrease to 16.1% and 9.4%, respectively. Despite this dilution, both companies will retain operational control over Vodafone Idea.

Positive Outlook from Analysts

Brokerage firm Citi has characterized this development as a major milestone with significant positive repercussions for Vodafone Idea. They highlighted the government’s timely support as a crucial factor for the company’s future stability. Citi anticipates that this strategic move will greatly enhance Vodafone Idea’s cash flow over the next three years and help the company finalize its bank debt fundraising efforts.

• Previous Fundraising Success: Vodafone Idea has already raised over ₹20,000 crore through its largest Follow-on Public Offer (FPO) last year, along with additional investments from its promoters.

Price Target and Future Potential

Citi has set a target price of ₹12 for Vodafone Idea shares, indicating a potential upside of 77% based on recent closing prices. They have also maintained a “buy” rating on Indus Towers, India’s leading telecom infrastructure provider, with a target price of ₹470, suggesting a possible 40.7% increase.

Indus Towers: A Beneficiary of Vodafone Idea’s Recovery

Citi believes that a recovery at Vodafone Idea could significantly benefit Indus Towers, especially given the financial pressures that have arisen due to delays in payments from Vodafone Idea. As operations stabilize, Indus Towers stands to gain from the resumption of rental payments and new tenancy rollouts.

• Long-Term Growth Forecast: Citi projects that Indus Towers could achieve a core EBITDA CAGR of 10% (excluding writebacks) from FY25-27, driven by an 8% growth in tenancy.

Conclusion: A Positive Shift for the Telecom Sector

Overall, the government’s intervention and the subsequent stake conversion signal a turning point for Vodafone Idea and its stakeholders. The restructuring is expected to boost cash flows, reduce default risks, and pave the way for a more stable telecommunications landscape in India. As the company aims for a revival, both Vodafone Idea and Indus Towers are positioned for potential growth in the rapidly evolving telecom market.