Vodafone Idea share price surge could be short-lived

Vodafone Idea (NSE: IDEA) share price surged on Monday, becoming the best-performing stock in the Nifty 50 index. The stock gained by over 20%, in its best day since November 2021 when the shares jumped by more than 18%. At its peak on Monday, the shares were in their highest level since December 14 of last year.

Has IDEA turned the page?

Vodafone Idea, the joint venture between Vodafone Group (LON: VOD) and Aditya Birla, has been under intense pressure in the past few years. The company was bailed out in 2021 by the Indian government following years of underperformance.

Are you looking for fast-news, hot-tips and market analysis?

Sign-up for the Invezz newsletter, today.

In the past few months, the company’s balance sheet has continued being stretched as the cost of doing business rose. Most importantly, the company has lost market share to other large players like Reliance Jio and Bharti Airtel. 

As I wrote in this report, Vodafone Idea lost over 3.5 million customers by October last year while Jio added more than 1.4 million customers. Data published last week showed that the company lost subscribers for 17 straight months. It shed 18.27 lakh users in November as Jio added 14.26 lakh.

The main catalyst for the Vodafone Idea stock price pop was the government’s decision to allow the firm to convert the $2 billion into equity. The new measure means that the company will not be under pressure to pay back the money. But at the same time, existing shareholders will be diluted as the company issues over 16.3 billion shares. Aditya Birla also committed to increasing its investments in the company.

Therefore, the IDEA share price jumped because the going concern challenges that most analysts were expecting have now improved. It also gives the company more breathing space as it battles stiff competition.

Not out of the woods yet

Vodafone Idea is not out of the woods yet. The company is facing stiff competition from the moneyed telecom giant Reliance Jio. As part of its strategy, Jio is using its strong balance sheet to offer significant discounts, which are wooing more customers. Jio also has a strong market share in 5G as it is available in 184 cities. It is followed by Airtel which is available in 52 cities. Vodafone Idea’s 5G rollout has been a bit slow.

Since Vodafone Idea has to match the price war, its profitability will be hit. The last results showed that Vodafone Idea’s operating expenses rose to 62.5 billion rupees in the quarter, pushing its total net loss to 926 million rupees ($927 million).

Vodafone Idea share price forecast

My last IDEA stock price outlook was accurate as the stock plunged to a low of 6.35 rupees. The stock jumped on Monday and retested the important resistance point at 8.60 rupees (~December 14 high). It also rose above the important resistance at 7.75 rupees (June 20 low). As the stock jumped, it moved above the 25-day and 50-day moving averages (MA). 

Therefore, I still believe that this bounce will be short-lived and that the stock will resume the downward trend in the coming days. If this happens, the next key level to watch will be at 7.75 rupees.