Vodafone Idea Ltd. share price target

Revenue decline of 4.3% was owing to exit of minimum ARPU customer, IUC revenue loss (~| 80 crore) as well as downtrading. The exit of 14.1 mn customers was much more than our anticipation marked the fourth consecutive quarter of subscriber base decline. We again reiterate that the ARPU increase of 3.8% QoQ is merely a mathematical kick on a lower subscriber base. Therefore, this does not reflect any improvement in pricing/up-trading, etc. The company's net addition of 4.1 mn 4G customers (largely conversion of own base in areas where it is expanding), was still...

Revenue growth was at 0.1% QoQ, with ARPU at | 104 (up ~16.9% QoQ). We note that ARPU increase is merely a mathematical kick on lower subscriber base. Therefore, it does not reflect any improvement in pricing/up-trading, etc. Most importantly, post-paid subscriber base at ~23.1 million declined sequentially by 0.57 mn (2.4% decline QoQ). We also highlight that the company's net addition of 5.4 million 4G customers (largely conversion of own base in areas where it is expanding) in Q4FY19, is still lower than competition, reflecting the weaker relative standing....

VIL is moving in the right direction by strengthening 4G rollouts, balance sheet through rights issue, stake sale in Indus and potential monetization of fiber assets. That said, low EBITDA, substantially higher leverage and persistent cash burn has put VIL in precarious position with limited room to err. Synergy benefits, substantial 4G sub additions and tariff hikes are essential. Pricing strategy by competitors is key for viability and stock sentiment hereon. We believe all these factors may play out. Our TP is highly sensitive to tariff increase. Vodafone Idea (VIL) 4QFY19 results were ahead of estimates. This was primarily led by inevitable synergy benefits post integration. That said, operating performance was feeble with flat revenues QoQ and modest data subscribers additions. BUY with TP of Rs 19 (10x FY21E EBITDA).

Revenue changes its course: A stellar jump in APRU helped clear the major hurdle of a continued downtrend in revenue, which stood flat sequentially at INR117.8b (in-line) in 4QFY19. This, coupled with INR2b one-offs, led to strong EBITDA growth of 57% QoQ to INR17.9b. Interestingly, even adjusted for oneoffs, EBITDA was up by a robust 39% QoQ (13% beat), primarily led by merger synergies (margin expanded 380bp to 13.5%). Adjusted for exceptional item and the DTA impact, IDEA reported a net loss of INR40.6b (v/s INR62.1b in 3Q). Concall highlights: (1) IDEA guided for capex of INR168b for FY20. (2) Net IUC EBITDA contribution stands at slightly over INR4b, which is likely to reduce to nil...

VIL requires INR600b over the next eight quarters to fund (a) estimated capex of INR326b, (b) spectrum payment liabilities of INR213b and (c) external debt servicing and interest cost. The rights issue of INR250b, along with Ideas INR50b stake sale in Indus, current cash position, and cumulative EBITDA of INR220b until FY21, will be the sources of funds. Despite the huge fund raise and the estimated EBITDA increase to INR126b by FY21, net debt is likely to remain at INR1,060b, with the net debt-to-EBITDA ratio at a steep 8.4x. Unlike Bhartis fund raise, which will help it to deleverage the balance sheet significantly, VILs estimated annual capex requirement and interest burden of over INR200b in FY21 may not be fulfilled even with an optimistic EBITDA of INR126b. Thus, without an ARPU increase, it may need another round of fund-raise to survive. Given the cash flow and capex requirements for telcos and the current price plans offered, there exists a huge opportunity to increase ARPU.

In our recent interaction with VIL's top management, they reinforced the stance on fasterthan-expected delivery of cost synergies, keep treading in the right direction on network integration, data capacity expansion, raising customer realization with minimum ARPU plans, and focusing on incremental 4G subscriber share. Management's focus remains on generating incremental revenues by increasing 4G coverage and creating additional data capacity. Although incremental data subscribers...

This has led to an increase in 4G population coverage to 65% v/s 40% at the time of merger. While taking a tariff hike in the current market situation is unlikely, management indicated that its initiatives on network synergies, minimum recharge voucher program and accelerating shift from 2G to 4G should drive EBITDA growth. The company expects to achieve cumulative EBITDA of INR200b in the next eight quarters. Based on our workings, we estimate the 3QFY19 EBITDA run-rate of INR11.4b to reach INR37.1b in 4QFY21, factoring in (a) INR12b synergy gains (INR78b opex synergy by FY21), (b) zero IUC gain v/s current estimate of INR4b and (c) INR17.7b from revenue-linked gains, led by the minimum recharge voucher program, increasing shift to 4G and ARPU increase. Management plans to source this from the INR250b rights issue, the INR50b Ideas stake sale in Indus, current cash & investments of INR136b, and cumulative EBITDA of INR200b over the next eight quarters.

Vodafone Idea's consolidated operational print continued to remain weak, albeit with a tad improvement QoQ. Q3FY19 was the first full quarter of merged entity. Hence, numbers are not comparable QoQ or YoY. Our analysis is based on comparison with pro-forma numbers (assuming full quarter of merger) and our estimates Revenues were at | 11,765 crore (vs. our estimate of | 12356 crore), down 2.2% QoQ (on proforma basis) led by impact of downgrade of packs, with ARPU at | 89 (up ~1.5% QoQ). Arithmetic ARPU uptick...

7 February 2019 Reversal in EBITDA trend led Vodafone Idea to witness growth for the first time (excl. one-offs) since the launch of RJio. LTL growth came in at 16% QoQ to INR11.4b (12% miss), led by synergy gains, despite LTL revenue decline of 2.2% QoQ to INR117.6b (in-line). (for exceptional item and DTA impact) net loss stood at INR62b (v/s INR44.5b in 2Q). A silver lining was the monthly exit revenue (Dec18 and Jan19) experiencing growth. (1) Combined FY19-20E capex guidance remains unchanged at INR270b (ex-redeployment). (2) Expect rights issue to get completed by early 1QFY20. (3) Expect network integration across all circles to get completed by Jun20. With estimated run-rate of a healthy INR2.5-3b quarterly synergy accretion in FY20, we expect EBITDA at INR81b.

At our targeted 10x FY21E EV/EBITDA, VIL is worth Rs 48/sh, after a whopping 64% dilution at Rs 45/sh. Vodafone Ideas (VIL) analysts meet exuberated managements confidence of it moving in the right direction, to stay in shape and benefit from the eventual improvements in the industry fundamentals. We concur. Yet, it shouldnt turn out to be merely optimistic posturing. There is no room to err.