RESULTS REVIEW 2QFY18 15 NOV 2017 Idea Cellular BUY HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters Ideation in progress Idea’s 2QFY18 numbers came in weak, as expected. Sequentially, revenue declined 8.6%, EBITDA 19.9%, subscribers 3.5% and ARPU 6.4%. Yet, healthy growth in data usage and strict cost control measures were key positives. Our positive thesis on Idea is premised on the proposed merger with Vodafone, and delivery on guided synergies of Rs 140bn, with ~60% in opex from the fifth year of merged operations. BUY with a TP of Rs 120. Our TP is based on pro-forma financials of the merged entities, and factors in modest synergies. In the medium-term, Idea could deliver superior returns, as its merger consummates in 2HCY18, and EBITDA rebounds in a broadly three-player market. Key highlights 2QFY18 highlights: Idea reported an 8.6% QoQ (19.7% YoY) decline in revenues vs. Bharti’s at 5.2% and Vodafone’s at 6.9%. Subscribers declined QoQ by 3.5% (Bharti +2.5%, Voda -2%). In a seasonally weak quarter, the impact on Idea was more profound, owing to a higher rural subscriber mix. This was also accentuated by a reluctance to compete aggressively, especially in the bundled-plans segment. Costs save the day: Idea’s EBITDA declined by 19.9% QoQ. The fall in EBITDA would have been sharper, but for a 6.4% QoQ decline in opex (5.7% in network, 11.9% in SG&A). As per the company, the decline in costs is driven by negotiations with vendors and optimisation. Concall takeaways: (1) Despite subdued 2QFY18, management sounded firmly optimistic. This seems to be driven by accelerated industry consolidation and Jio’s recent price hikes, (2) Post negative sub adds in 1HFY18, it has turned positive in Oct and Nov month- to-date, (3) Management strongly believes ARPU will inch upwards and could be as early as 4QFY17, despite adoption of bundled-plans as down-trading has largely played out, and (4) Active infra sharing and ICR agreements with Vodafone would provide boost to Idea’s LTE coverage and capacity, while keeping capex in check. Nearly 100% of incremental capex would be for LTE. Near-term outlook: The near term remains challenging, as down-trading of subscribers will impact ARPU at least in 3QFY18, and so will the impact of the IUC rate cut. Stake sale in Indus Towers is a potential near-term trigger. Consolidated Financial Summary (excluding Vodafone) (Rs bn) 2QFY18 2QFY17 YoY (%) 1QFY18 QoQ (%) FY16 FY17 FY18E FY19E FY20E Net Sales 74.7 93.0 (19.7) 81.7 (8.6) 359.5 355.8 289.4 291.9 328.1 EBITDA 15.0 28.4 (47.1) 18.8 (19.9) 119.7 102.0 59.5 68.6 95.6 APAT (11.1) 0.9 (1,330.2) (8.2) 35.8 27.3 -4.0 -46.5 -45.4 -30.3 Diluted EPS (Rs) (3.1) 0.3 (1,330.2) (2.3) 35.8 7.6 (1.1) (12.9) (12.6) (8.4) P/E (x) 12.4 (84.7) (7.3) (7.5) (11.2) EV / EBITDA (x) 5.8 8.2 15.1 13.4 9.6 RoE (%) 11.2 (1.6) (20.8) (25.5) (21.7) Source: Company, HDFC sec Inst Research INDUSTRY TELECOM CMP (as on 15 Nov 2017) Rs 94 Target Price Rs 120 Nifty 10,118 Sensex 32,760 KEY STOCK DATA Bloomberg IDEA IN No. of Shares (mn) 3,607 MCap (Rs bn) / ($ mn) 338/5,175 6m avg traded value (Rs mn) 1,326 STOCK PERFORMANCE (%) 52 Week high / low Rs 124/66 3M 6M 12M Absolute (%) 8.5 8.8 31.2 Relative (%) 4.3 0.7 6.6 SHAREHOLDING PATTERN (%) Promoters 42.4 FIs & Local MFs 8.5 FPIs 26.5 Public & Others 22.6 Source : BSE Himanshu Shah [email protected]+91-22-6171-7315
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RESULTS REVIEW 2QFY18 15 NOV 2017
Idea Cellular BUY
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
Ideation in progressIdea’s 2QFY18 numbers came in weak, as expected. Sequentially, revenue declined 8.6%, EBITDA 19.9%, subscribers 3.5% and ARPU 6.4%. Yet, healthy growth in data usage and strict cost control measures were key positives. Our positive thesis on Idea is premised on the proposed merger with Vodafone, and delivery on guided synergies of Rs 140bn, with ~60% in opex from the fifth year of merged operations. BUY with a TP of Rs 120. Our TP is based on pro-forma financials of the merged entities, and factors in modest synergies. In the medium-term, Idea could deliver superior returns, as its merger consummates in 2HCY18, and EBITDA rebounds in a broadly three-player market. Key highlights 2QFY18 highlights: Idea reported an 8.6% QoQ
(19.7% YoY) decline in revenues vs. Bharti’s at 5.2% and Vodafone’s at 6.9%. Subscribers declined QoQ by 3.5% (Bharti +2.5%, Voda -2%). In a seasonally weak quarter, the impact on Idea was more profound, owing to a higher rural subscriber mix. This was also accentuated by a reluctance to compete aggressively, especially in the bundled-plans segment.
Costs save the day: Idea’s EBITDA declined by 19.9% QoQ. The fall in EBITDA would have been sharper, but for a 6.4% QoQ decline in opex (5.7% in network, 11.9% in SG&A). As per the company, the decline in costs is driven by negotiations with vendors and optimisation.
Concall takeaways: (1) Despite subdued 2QFY18, management sounded firmly optimistic. This seems to be driven by accelerated industry consolidation and Jio’s recent price hikes, (2) Post negative sub adds in 1HFY18, it has turned positive in Oct and Nov month-to-date, (3) Management strongly believes ARPU will inch upwards and could be as early as 4QFY17, despite adoption of bundled-plans as down-trading has largely played out, and (4) Active infra sharing and ICR agreements with Vodafone would provide boost to Idea’s LTE coverage and capacity, while keeping capex in check. Nearly 100% of incremental capex would be for LTE.
Near-term outlook: The near term remains challenging, as down-trading of subscribers will impact ARPU at least in 3QFY18, and so will the impact of the IUC rate cut. Stake sale in Indus Towers is a potential near-term trigger.
Weak performance, in the light of stiff competition from Jio and Bharti, and management’s reluctance to aggressively move to bundled plans in the past Stringent cost control in tough times led by negotiations with vendors especially on energy costs, and optimisation
Negative net additions impacted by intense competition and Idea’s weak 4G presence Nevertheless, management remains geared up to augment its 4G footprint, with nearly 100% of incremental capex towards 4G, capacity augmentation through active infra sharing and ICR with Vodafone, and aggressive bundled plans Notably, subs addition is becoming positive in Oct/Nov 3.3mn QoQ 3G+4G data subs addition and healthy 73% QoQ data usage growth (vs. 66% for Bharti and 61% for Vodafone) are key positives
IDEA CELLULAR : RESULTS REVIEW 2QFY18
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Key Assumptions (Pro-forma financials of Idea and Vodafone)
* Our ARPU is net of IUC rate cut impact in FY18 (effective1-Oct) from 14p to 6p per minute and nil from1-Jan - 2020 Stake sale in standalone towers by Idea and Vodafone to ATC for Rs 78.5bn, and potential stake sale in Indus Towers of Idea’s 11.15% (estimated at ~Rs 80-85bn) to deleverage the balance sheet and would be positive
Our SoTP for Idea is Rs 120 based on (1) Rs 53 @ 9x Sep-19 EV/EBITDA multiple for business as-is for Idea plus Vodafone, (2) Rs 13 for combined entity’s 11% stake in Indus Towers, and (3) Rs 54 from synergy benefits towards merger
Synergy % 2.5% 7.5% 12.5% 15.0% - Idea 2.5% 7.5% 12.5% 15.0% - Voda 2.5% 7.5% 12.5% 15.0% Synergy benefit p.a. (Rs bn) 34 53 74 87 - Idea 4 14 24 30 - Voda 5 14 25 32 - Capex synergies 25 25 25 25 Synergy value (Rs bn) @ 9x 305 477 665 781 - Idea 39 122 213 269 - Voda 41 130 227 288 - Capex 225 225 225 225 * Operating costs includes Network, Employees, Sales and marketing & General and Administration costs
Idea-Vodafone estimate the merger process to complete in 2HCY18 We estimate the synergy benefit to kick-in from FY19 on opex costs Idea and Vodafone incur capex of Rs 150-170bn p.a. We estimate the synergies on capex at Rs 25bn p.a. Idea and Vodafone estimate the synergy benefit at Rs 140bn p.a. after fourth year of operations with ~60% of synergies towards operating costs
IDEA CELLULAR : RESULTS REVIEW 2QFY18
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Sale of towers to be largely value neutral, yet positive
We see stake sale in standalone towers by Voda/Idea and Indus towers by Idea as largely value neutral (opex replaces capex). However it is near-term positive as de-leverages balance sheet and provides ammunition to combat competition if the scenario deteriorates. Vodafone and Idea already announced sale of standalone towers to ATC for Rs 78.5bn. Stake sale in Indus could be a near-term potential trigger.
Impact of Standalone tower sales Number of towers 20,000 Tenancy 1.60 Number of tenants 32,000 Loss of tenants 6,300 Number of tenants 25,700 Rental/tenant/month 30,000 Loss of EBITDA (9,252) Savings in interest (@ 8%) 6,280 Savings in depreciation/capex (@ 5%) 3,925 Net impact on PBT/Cash flow 953 Tax impact (@ 30%) 286 Net impact on PAT/Cash flow 667 Multiple (X) 10 Value from stake sale in tower business 6,671 Value per share 1 Source: HDFC sec Inst Research
Sale of towers though neutral form value per share perspective, yet is positive from balance sheet stand-point
Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
Date CMP Reco Target 15-Nov-17 94 BUY 120
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