Goldman Sachs Issues 'Sell' on Vodafone Idea but Buys in FPO: What's Happening?

Goldman Sachs recently reaffirmed its 'sell' rating on Vodafone Idea (Vi), citing the telecom operator's struggles in maintaining market share despite recent capital infusions. The brokerage, however, sparked confusion after its involvement in Vodafone Idea’s follow-on public offering (FPO) came to light. This raised questions as to why Goldman, a known critic of the telco’s prospects, would participate in its capital raise.

Goldman’s Bearish Outlook on Vodafone Idea

In its September 6 report, Goldman Sachs expressed concerns about Vodafone Idea’s ability to halt its market-share erosion. The brokerage believes the Indian telecom market is highly competitive, with Vodafone Idea lagging behind rivals such as Bharti Airtel and Reliance Jio in terms of capital expenditure (capex). Goldman Sachs argues that capex is directly tied to revenue market share and expects Vodafone Idea to underperform over the next 3-4 years due to its relatively low spending.

Goldman did marginally increase its price target from Rs 2.2 to Rs 2.5 per share, with its most optimistic scenario valuing Vodafone Idea at Rs 19 per share, assuming no immediate government repayments and a favourable adjustment of AGR (Adjusted Gross Revenue) dues.

Spotted Buying in Vodafone Idea’s FPO

Despite this bearish outlook, eagle-eyed internet users noticed that Goldman Sachs had bid for 81.83 lakh shares in Vodafone Idea’s FPO at Rs 11 per share. This seemed at odds with the brokerage's 'sell' stance, prompting speculation about the investment’s true nature.

The ODI Factor

The key to understanding this apparent contradiction lies in the nature of the purchase. Goldman Sachs was not necessarily buying shares for its own proprietary book but may have been facilitating a trade on behalf of a client through an Offshore Derivative Instrument (ODI). ODIs allow foreign investors to gain exposure to Indian markets without registering with the Securities and Exchange Board of India (SEBI). Therefore, while Goldman Sachs was involved in the FPO, it was likely acting as a conduit for another foreign investor rather than making a direct investment decision.

Goldman’s Role as Market Maker

This scenario is not uncommon, as global financial institutions often have separate research and trading divisions. While one arm of Goldman Sachs issued a 'sell' rating on Vodafone Idea, another division might have facilitated the trade in its role as a market maker or intermediary. As explained by market experts, such transactions do not necessarily reflect a conflict of interest, as different arms of large institutions often serve varied functions.

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Goldman Sachs' involvement in Vodafone Idea’s FPO doesn’t contradict its bearish stance on the company. Instead, it highlights the complex nature of global financial markets, where brokers often act on behalf of clients while maintaining independent research views. Investors should be mindful of the different roles financial institutions play and focus on the underlying fundamentals when making investment decisions.

Source: MoneyControl