RESULTS REVIEW 1QFY19 01 AUG 2018 Idea Cellular BUY HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters Hope pins on merger synergies Idea’s 1QFY19operating performance was weak led by 6.6mn subscriber loss, flat data subscribers and modest 1mn broadband subscriber additions. This we believe is owing to focus on impending merger. Idea’s high leverage (Rs 1.1tn for merged entity; ~14-15x net debt/exit EBITDA) constraints it from being aggressive in the market place by steeping up capex. This may necessitate equity infusion. Delivery of guided synergy benefits from the merger and likely industry repair can lead to enhanced EBITDA and thus improvement in leverage ratio. Merger with Vodafone would provide the wherewithal to combat competition by expanding broadband footprint (~80-85% of population). These are potential near-term re- rating triggers. Reiterate BUY with TP of Rs 70 (9x EV/E plus synergies). Key highlights 1QFY19 highlights: Sequentially, revenue declined by 4% to Rs 58.9bn (adjusted ~2.9%). Adjusted EBITDA was down 35% QoQto Rs 6.5bn due to higher network costs owing to increase in diesel prices and sale of standalone towers. Idea (and Vodafone) had been matching Bharti on operating performance since Jio launch barring 1QFY19. In our view, under-investment in networks (constrained by balance sheet) and muted response to unsustainable market pricing have started to reflect in weak subscriber and data growth. Concall takeaways: (1) Management reiterated its synergy guidance of $10bn NPV, annual Rs 140bn from fourth year of merged operations including 60% from opex (2) Broadband coverage gap with leaders to be bridged in 2-3 quarters led by spectrum integration and redeployment of equipment’s at overlapping locations (3) Tariff increase is inevitable as current tariffs are unsustainable (4) 70% of merged entity’s spectrum to be deployed for 4G (5) Co has paid Rs 33.3bn in cash and bank guarantee of Rs 39.2bn under protest for one time spectrum charges to avoid further delay in merger (6) Rationalized S&D spend on new acquisitions, reflecting in weak trends. Near-term outlook is tough owing to severe EBITDA erosion (and high leverage), if the tariff war prolongs. Consolidated Financial Summary (excluding Vodafone) (Rs bn) 1QFY19 1QFY18 YoY (%) 4QFY18 QoQ (%) FY17 FY18 FY19E FY20E FY21E Net Sales 58.9 81.7 (27.9) 61.4 (4.0) 355.8 282.8 227.7 246.3 258.5 EBITDA 6.6 18.8 (64.8) 14.5 (54.4) 102.0 60.5 16.1 38.9 74.5 APAT (17.8) (8.1) 119.0 (9.6) 85.5 (4.0) (41.7) (76.3) (61.8) (42.4) Diluted EPS (Rs) (5.0) (2.3) 119.0 (2.7) 85.5 (1.1) (11.6) (21.2) (17.2) (11.8) P/E (x) (49.5) (4.8) (2.6) (3.2) (4.7) EV / EBITDA (x) 7.3 13.0 47.4 20.6 10.9 RoE (%) (1.6) (16.0) (28.0) (25.6) (22.4) Source: Company, HDFC sec Inst Research INDUSTRY TELECOM CMP (as on 31 Jul 2018) Rs 55 Target Price Rs 70 Nifty 11,357 Sensex 37,607 KEY STOCK DATA Bloomberg IDEA IN No. of Shares (mn) 4,360 MCap (Rs bn) / ($ mn) 239/3,492 6m avg traded value (Rs mn) 1,199 STOCK PERFORMANCE (%) 52 Week high / low Rs 119/48 3M 6M 12M Absolute (%) (20.7) (39.9) (40.7) Relative (%) (27.6) (44.7) (56.2) SHAREHOLDING PATTERN (%) Promoters 42.6 FIs & Local MFs 11.9 FPIs 26.0 Public & Others 19.5 Source : BSE Himanshu Shah [email protected]+91-22-6171-7315
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RESULTS REVIEW 1QFY19 01 AUG 2018
Idea Cellular BUY
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
Hope pins on merger synergiesIdea’s 1QFY19operating performance was weak led by 6.6mn subscriber loss, flat data subscribers and modest 1mn broadband subscriber additions. This we believe is owing to focus on impending merger.
Idea’s high leverage (Rs 1.1tn for merged entity; ~14-15x net debt/exit EBITDA) constraints it from being aggressive in the market place by steeping up capex. This may necessitate equity infusion.
Delivery of guided synergy benefits from the merger and likely industry repair can lead to enhanced EBITDA and thus improvement in leverage ratio. Merger with Vodafone would provide the wherewithal to combat competition by expanding broadband footprint (~80-85% of population). These are potential near-term re-rating triggers. Reiterate BUY with TP of Rs 70 (9x EV/E plus synergies).
Key highlights
1QFY19 highlights: Sequentially, revenue declined by 4% to Rs 58.9bn (adjusted ~2.9%). Adjusted EBITDA was down 35% QoQto Rs 6.5bn due to higher
network costs owing to increase in diesel prices and sale of standalone towers.
Idea (and Vodafone) had been matching Bharti on operating performance since Jio launch barring 1QFY19. In our view, under-investment in networks (constrained by balance sheet) and muted response to unsustainable market pricing have started to reflect in weak subscriber and data growth.
Concall takeaways: (1) Management reiterated its synergy guidance of $10bn NPV, annual Rs 140bn from fourth year of merged operations including 60% from opex (2) Broadband coverage gap with leaders to be bridged in 2-3 quarters led by spectrum integration and redeployment of equipment’s at overlapping locations (3) Tariff increase is inevitable as current tariffs are unsustainable (4) 70% of merged entity’s spectrum to be deployed for 4G (5) Co has paid Rs 33.3bn in cash and bank guarantee of Rs 39.2bn under protest for one time spectrum charges to avoid further delay in merger (6) Rationalized S&D spend on new acquisitions, reflecting in weak trends.
Near-term outlook is tough owing to severe EBITDA erosion (and high leverage), if the tariff war prolongs.
Adjusted for standalone tower sales and full impact of IUC rate cut on international incoming calls (vs. two months in 4QFY18), revenue has declined by ~2.9% QoQ 4QFY18 included one off expense reversals of Rs 4.5bn viz. Network Rs 2bn, Employee Rs 1.4bn and LF Rs 1.1bn Increase in network costs QoQ adjusted for one offs owing to sale of standalone towers and increase in diesel costs Extraordinary income includes sale of Standalone towers for Rs 41bn and gain of Rs 20bn
Steep decline in ARPU of incumbents led by (a) downtrading/churn of high ARPU customers owing to shift to unlimited bundled plans and (b) IUC rate cut on domestic calls from 14p/min to 6p/min and (c) IUC rate cut on international incoming calls from 53p/min to 30p/min Jio with its ubiquitous 4G only network is highly successful in moving the market from voice to data and remains a dominant market leader Adoption of bundled plans from end Oct17 helped Idea regain the subscriber momentum
693 729 823 673 938 1,088 1,295 1,482 120.4 14.4 MOUs/Sub (Mins) Bharti 406 419 471 507 518 575 670 700 38.0 4.5 Idea 368 385 412 441 459 509 577 609 38.1 5.5 Voda 306 311 339 - - - - - - Jio 626 695 716 744 - 4.0 Source: Companny, HDFC Sec Inst research * Idea changed its data subscriber definition from 1QFY18 to minimum monthly usage of 15MB/month
Incumbents are showing healthy growth in data usage (except 1QFY19 by Voda/Idea). This is mildly positive as are able to engage consumers. However, with virtual unlimited plans (1.5GB/day for nominal Rs 125/month including taxes), data subscriber growth is more important along-with usage. Jio scores significantly above incumbents over here.
IDEA CELLULAR : RESULTS REVIEW 1QFY19
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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 from 1-Jan - 2020 Idea’s high leverage and sliding EBITDA puts near term pressure on the performance This is despite equity infusion of (Rs 67.5bn) and stake sale in standalone towers (Rs 78.5bn) and proposed 11% stake sale in Indus (~Rs 60bn)
Value per share* (without merger) 261 203 12 (82) (40) 29 - Idea 199 116 (1) (87) (48) 22 - Voda 323 291 24 (78) (32) 36
Value per share (with merger) 261 203 12 (37) 30 109 - One time tower exit penalty - - - (7) (7) (7) - Merger synergies** - - - 52 77 87 Source: Company, HDFC sec Inst Research; * includes standalone tower sale of Voda-Idea, stake sale in Indus and equity infusion of Rs 67.5bn
in Idea and similar amount by Voda **refer table below calculation on merger synergies
Our SoTP for Idea is Rs 70 based on avg of FY20-21 TP including merger synergies Exit penalty is calculated on 60k towers @ Rs 1mn per tower
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 (i.e. Rs 85bn)
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
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