Nomura upgrades Vodafone Idea and raises price target by over 100%; Tariff hike key trigger

Nomura expects the entire telecom industry to take a material tariff hike of 15% following the conclusion of the Lok Sabha election.
Brokerage firm Nomura has upgraded Vodafone Idea to "neutral" from its earlier rating of "sell," marking the second upgrade for the telecom service provider this month.

The brokerage said that Vodafone Idea is set to meet "clear skies ahead" but a long journey remains to be traversed. However, the tempest or the storm, has largely passed, according to Nomura.

Earlier in May, brokerage firm BoFA Securities had also upgraded the stock to "Neutral."

Nomura has increased its price target on Vodafone Idea by over 100% to ?15 from ?6.5 earlier. The brokerage said that the outlook for the entire telecom industry has improved considerably.

All players are aligned on the need for an increase in the Average Revenue per User (ARPU) and the industry setting into a three-player private market.

Last week, brokerage firm Kotak Institutional Equities had also written in its note that the fund raising exercise from Vodafone Idea ensures continuation of a 3+1 telecom market in India, with three being the incumbent private players, along with the state-run BSNL.

Like many other analysts on the street, Nomura too believes that an impending tariff hike will be a key trigger for stocks like Vodafone Idea. It expects the entire telecom industry to take a material tariff hike of 15% following the conclusion of the Lok Sabha election.

Nomura also expects the government to offer some form of relief to Vodafone Idea when its upcoming payments are due in financial year 2025.

Vodafone Idea has to cough up ?29,000 crore in the second half of financial year 2026 and ?43,000 crore from financial year 2027 to financial year 2031. In case the government ends up converting the dues into equity their stake may go up to 81%, while promoter stake could fall to 9% from 36% currently.

Brokerages may not have issued "buy" recommendations on Vodafone Idea post its ?18,000 crore Follow-on Public Offer (FPO) but are shifting to a "wait-and-watch" mode. Seven out of the 18 analysts who have coverage on Vodafone Idea have a "neutral" rating on the stock, while IIFL has an "Add" rating. 10 other analysts still have a "sell" call on the stock.

Nuvama Alternative and Quantitative Research also expects Vodafone Idea to be a potential MSCI inclusion during its August review, which can result in potential inflows of $212 million.

Among those 10, JPMorgan remains "underweight" on the stock but raised its price target to ?7 from ?3 earlier. It said that fund raising is not sufficient for competitiveness. CLSA also maintained its "sell" rating on the stock with a price target of ?7, citing that AGR and debt relief is critical.

Shares of Vodafone Idea are still down 22% so far this year, but have risen nearly 90% in the last 12 months.