Vodafone Idea Ltd. share price target

22 November 2018 Management has brought forward the synergy target (INR140) achievement (INR84b) will be in the form of opex reduction, majority (INR55b) of which will be achieved by minimizing network opex (INR18b already accrued with 66,000 site exits in 2QFY19). Additional 22,000 overlapping site exits and network integration should lead to further ~INR37b rental/energy savings over 30 months. Management explained that it will decisively streamline duplication of network in ~300 districts, wherein it has revenue/EBITDA share of 10%/-41% and market potential too is very low. Further, it will save INR17b/INR12b from G&A;/customer opex synergies (includes streamlining customer acquisition and servicing, and consolidation of A&P; cost of the two brands). Vodafone Idea Being the spectrum leader in the market (spectrum life of nearly 16-18 years), the company has at hand the key task of accelerated deployment of 4G spectrum and network rollout.

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) 2QFY19 was weak with revenue decline of 7.1% QoQ (Bharti fell 2.2%, while Jio leapt 14%). ARPU dropped 4.5% and subscribers cracked 3%. VIL added 4.4mn data subs, weaker than peers. The intent to infuse funds signals long-term commitment.

We value RJio at 10x Jun-20E EV/EBITDA (vs. 9x for Bharti/Idea) at an EV of Rs 2.9tn (Rs 490/sh). Jios FY18 AR depicts that (a) its capex intensity remains high. It spent ~Rs 502bn in FY18 including Rs 133bn for capitalized interest and opex (b) Rs 700bn (30%) of its fixed assets is yet to be operationalized (c) vendor financing provided ~22% (or Rs 561bn) of Jios cumulative funding of Rs 2.4tn. It also accounts for ~40% of its net debt (Rs 1.4tn) outstanding as of Mar18 and (d) Jios gross cumulative investment of Rs 2.4tn is similar to Bhartis India business (Rs 2.5tn), but with network capacities that carried >3.7x data traffic in FY18 (3x in 1QFY19).

Reiterate BUY with TP of Rs 70 (9x EV/E plus synergies). Ideas 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. Ideas 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.

Consolidated revenues came in lower at | 5889.2 crore (down 4% QoQ) vs. our estimate of | 5989.6 crore, impacted by lower ARPU for the quarter, which was at | 100, down 4.8% QoQ, 29.1% YoY vs. our estimate of | 102. Subscriber addition for the quarter was also muted vs. peers with net subscriber loss of ~4 million QoQ, on VLR basis. Voice volume usage for quarter was up 5.8% QoQ at 349.5 bn minutes while data volumes for quarter were up 24.5% QoQ at 992 mn MB with per sub data usage at 7.3 GB/sub/month, up 21% QoQ...

in data volume. Capex stood at Rs9.8bn and annual capex guidance intact at Rs70bn. Vodafone are more vulnerable to lose subscribers during their merger integration. Weak Q1FY19 has led to another round of EBITDA downgrade. Current cash balance (after fund raising & tower monetization) and merger-related benefits would take care of cash burn during FY19-20E. However, net debt/EBITDA for merged entity to remain at elevated levels of ~6.7x in FY20E, restricting aggression on capex spends and retaining RMS. We are already factoring in aggressive opex savings of >Rs120bn over FY19-20E. We retain SELL with TP of Rs39, valuing at 8x FY20E pro-forma Sept'20 EBITDA....

Revenue decreased by 4.16% to Rs. 5866.7 Cr in Q1FY19 when compared to the previous quarter. Idea Cellular Ltd Q1FY19 results Comment

ARPU pressure continues due to down trading towards low tariffs and select offerings below headline tariffs too. However, the impact from RJio's postpaid plans and Jiophone is limited. Merger completion may be delayed by a month to July/August. Vodafone-Idea may not get a direct waiver, though the Bharti-Telenor deal had received Supreme Court clearance for one-time spectrum fee. There is limited overlapping between both operators' broadband (3g, 4g) network. This should support coverage expansion for the merged company

Revenue decreased by 5.91% to Rs. 6121.5 Cr in Q4FY18 when compared to the previous quarter. Idea Cellular Ltd Q4FY18 Results Comment

Consolidated revenues came in lower at | 6137.3 crore (down 5.7% QoQ) vs. our estimates of | 6212.4 crore, impacted by international IUC cuts (impact of | 52 crore) and price competition. The miss was on account of higher than expected impact of price erosion owing to competition. The resultant ARPU was at | 105 (down 7.9%QoQ) vs. our expectations of | 107. The voice volume usage continued to be buoyed by free outgoing offers under the bundled package, resulting in 16.9% QOQ growth in voice volumes to 330.3 billion minutes. The...