Should You Invest in Vodafone Idea at these Levels?

Aug 16, 2021

Rahul Shah, Editor, Profit Hunter

There are investors who believe in buying only the best quality merchandise.

Thus, even if an average quality stock is trading at very attractive valuations, they won't buy because it's not of the quality they desire.

I approach things a little differently. For me, nearly every stock might be cheap in one price range and expensive in another.

So, I am very likely to choose an average quality stock over a good quality one if the former promises more bang for the buck.

By that logic, isn't it time to turn bullish on Vodafone Idea?

After all, one of the biggest telecom companies in India cannot be worthless.



And given the correction in the stock price, it's definitely cheap at the current price range. So it's almost a cinch to be invested in, right?

Well, not so fast.

One look at the table below and you will realise why I have resisted the temptation of recommending Vodafone Idea in any of my services.

Vodafone Idea: Going from Bad to Worse

EPS  
FY15 5.4
FY16 4.6
FY17 -0.7
FY18 -5.8
FY19 -16.7
FY20 -25.7
FY21 -15.7
   
Debt to Equity (x) -4.1
   
Max. ROE 16.2
Min. ROE -226.7
Average ROE (%) -20.1
Data Source: ACE Equity

Yes, I did say nearly every company is cheap in one price range and expensive in another.

But the operative word here is 'Nearly' and not 'All'.

Unfortunately, Vodafone Idea is a part of a very small set of companies that separates 'Nearly' from 'All'.

As the table highlights, the company doesn't lend itself well to an investment operation.

For it to be judged cheap or expensive, I need to have a decent grasp of the company's intrinsic value.

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I need to know its true earnings potential. The EPS of the company has been too volatile to arrive at a proper intrinsic value of the company.

In fact, the company has recorded losses in five of the past seven years and its net worth is negative now.

The first and foremost rule in investing of any kind is that your principal amount should be safe. There should be a minimum risk of downside. Only then should the potential upside be ascertained.

This does not seem to be the case with Vodafone Idea. Given how the company has been racking up losses, there is no downside protection in sight for the stock.

The stock can correct as much as 50% and that too within no time. In fact, this is exactly what has happened over the last few months. The stock is down almost 50% from its 52-week highs and doesn't look done yet.

I know what you are thinking.

Before the recent correction, the stock has been a fantastic 4-bagger. Thus, the possibility of a similar upside in the future cannot be denied. Especially when you consider the fact that it belongs to a sector with a very bright future.

Indeed. That's certainly one of the possibilities.

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However, when you invest in a stock, you need a certain reference point, below which the stock can be considered cheap and significantly above which it can be considered expensive.

Since it's difficult to arrive at this reference point i.e. the intrinsic value of the company, luck is likely to play a large role than skill in the overall returns you can earn from this stock.

Therefore, it's more of a speculation for me. I would like to stay away from speculation irrespective of the potential upside.

Thus, unless the company gets its act together and shows a marked improvement in fundamentals, I am not likely to recommend the stock in any of my services.

And this applies not just to Vodafone Idea but every company with similar fundamentals.

Warm regards,

Rahul Shah
Rahul Shah
Editor and Research Analyst, Profit Hunter

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2 Responses to "Should You Invest in Vodafone Idea at these Levels?"

Tarun Agarwal

Aug 17, 2021

Dear Rahul

Like all other articles from you ,this too is full of insight & facts . But I think taking investment call is stocks like VI should be based on an entirely different methodology .. as startup valuation should not be done on basis of investing principles which are used for established players ..
Its about taking a bet on change of business fundamental than comparing internsic value versus current market value..

Bscause the numbers which are appearing in books & financial statements become irrelevant for "special circumstances stocks " , be it VI or MTNL .. In case of MTNL ,the expected net realisable value of Fixed assets is much more than the value of business itself which cannot be considered as per the book value of these fixed assets as per financial statement.

Your views please

Regards
Tarun Agarwal

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Somayajulu VN

Aug 16, 2021

Dear Rahul

A very good timely review on VodaIdea. You have provided a right view to the investors. Thanks.

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