Vodafone Idea, fund raise speculation and the Bezzle

Someone fool you once, shame on him/her. Someone fool you twice, shame on you. But if someone fools you again and again... and again, shame on who? Is it on the pump and dump operator, the investor, the regulator or the entire ecosystem?

This is the question that gets thrown up every now and then, as baseless and (what are actually) amusing speculations of new parties interested in buying stake in Vodafone Idea keeps getting planted again and again. Back in September 2023 there were rumours that Verizon or Amazon would buy a stake. Recently it was Elon Musk and Starlink.  The company has duly denied all of these, but the frenzy in the stock ensues. Sometimes it appears like the only credential required for a stock to move up is that it should be a single-digit or low double-digit stock, and vested operators will do the job of rigging up the price.

While these rumours helped push up the stock throughout last year till now, and in many cases by drawing in gullible small investors, not a single penny has actually been invested by any interested party. From the time few years back when external investment was actively sought till now, US Fed funds’ rate have moved up from zero to 5.5 per cent, while RBI’s repo rates have moved up from 4 to 6.50 per cent.

The bare fact is that telecom is a complicated business with periodical phases of heavy cash-guzzling investments. If it was challenging to raise capital at zero interest rates, it will be humongously more testing when the cost of capital is much higher after interest rates have moved up. It is no surprise that globally telecom stocks don’t make it to the best performers list or largest companies by market cap. In India alone the telecom stocks have created better value as a quasi-duopolistic nature which has created moats for Bharti Airtel and Reliance Jio.

The Bezzle

So what if the rumours are fake? One would be tempted to ask this as Vodafone Idea shares have rallied to five-year highs. But here is where the the ‘Bezzle’ has some answers.

Economist John Kenneth Galbraith introduced the concept of what he termed the bezzle, which exists during phases of euphoria in markets. According to him, at any given time there exists an inventory of undisclosed embezzlement. Weeks or months may elapse between commission of this crime of embezzlement and its discovery.

For example, in the case of Vodafone Idea, it is obvious that the rumours of investment by AT&T or Amazon or Elon Musk have been planted by the ‘embezzlers’. At the same time, those invested earlier or after these rumours are fine as the stock has remained buoyant even as rumours keep getting churned. So, there is phase where the embezzler gains while the person embezzled feels no loss. But this is only till the music keeps playing. At sometime euphoria and fundamentals will have to meet.

At 16 times, one year forward, EV/EBITDA, Vodafone Idea is amongst the most expensive telecom stocks in the world. This is further complicated with high losses at the net profit level and interest coverage ratio well below 1. Even if and when an investor pumps in money to fund its operations and buys a significant stake, it will come with a massive dilution to existing investors.

When this realization dawns, those who entered the stock at high prices during the run up in the last one year, may realise that they have been embezzled! The embezzler would have moved on by then with neat profits.

The current frenzy in Vodaone Idea reminds one of another telecom stock from the earlier bull market — Tulip Telecom. From over a price of ₹200, the stock sank to ₹5. From there it rallied all the way back to above ₹20 on its path to zero. To be clear, Vodafone Idea will not have such an ending. With decent operations (if not for the debt overhang), a good management team and promoter attempting their best amidst huge challenges and government owning 33 per cent, it is likely the company will survive in some form. The question though is, does the current stock price reflect the company’s intrinsic worth? We shall know when the bezzle unravels.