Vodafone Idea Ltd. share price target

Idea Cellular reported better-than-expected operating performance, which was driven by one-offs of Rs4.4bn. Adjusting for one-offs, EBITDA stood at Rs10bn, in line with estimate and EBITDA margin stood at 16.4% (-238bps qoq). KPI's were weaker than Bharti Airtel in terms of total and data subscriber additions, ARPU decline. Capex stood at Rs21bn with annual capex of Rs70bn, in line with stated guidance. Competitive intensity continued to remain elevated with 1) competitors aggressively adding subscribers, 2) adding content to portfolio and spending substantially higher capex for both broadband coverage and capacity. Idea and Vodafone are struggling with...

ARPU downtrading hurts earnings; merger synergies to support in FY19 One-offs provide solace to EBITDA: Consol. revenue declined 6% QoQ to INR61.4b (2% miss), led by ARPU downtrading (-8% QoQ to INR105). However, consol. EBITDA rose 18% QoQ to INR14.5b (39% beat), driven by a decline in opex cost (incl. INR4.4b provision reversal one-offs). Excluding one-offs, EBITDA stood at INR10.1b (-18% QoQ). Net loss narrowed to INR9.6b (est. of INR15.8b), led by better-than-expected EBITDA. For FY18, revenue declined 21% YoY to INR282.8b (1% miss), while EBITDA fell 41% to INR60.5b (6% beat). Net loss...

4QFY18 is likely to be another weak quarter for Bharti and Idea. Tariff cuts in Jan-18, IUC rate cut on international incoming calls from 53p to 30p from 1st February, 2018 and ARPU down trading on account of increasing proportion of bundled plans subscribers to exert pressure on revenues of incumbents. Zee is well-poised for strong operating performance in the near term led by twin benefits of viewership gains and recovery in ad spends partly led by low base owing to demonetization. We expect Zee to report ad revenue growth of 27% YoY. Like-to-like ad revenue growth adjusted for sale of sports business to be ~20%. Subscription revenue growth is expected to be modest.

During Q3FY18, consolidated revenue declined by 13% QoQ as voice and data rates plunged 24% and 26% QoQ, respectively impacted by sharp cut in IUC and ARPU downtrading leading to fall in realization. EBITDA margin continues to remain under pressure and fell by 130bps QoQ to 18.8% due to pricing pressure and IUC cut. With the merger process expected to be completed by H1CY18, we expect synergies to start accruing from FY20E at Rs2,048 crore (nil FY19E) leading to an expansion in EBITDA margin to 28.4% in FY20E for the combined entity....

Idea Cellular (IDEA) announced that it has completed equity issuance of INR35b via the qualified institutional placement (QIP) route (@INR82.5, 10% equity dilution). This, along with capital raising of INR32.5b via preferential issue to promoters (@INR99.5, 8% equity dilution), completes IDEA's equity funding of INR67.5b (17% dilution). Total equity raising by Vodafone and Idea, along with the tower sale, will reduce the combined entity's (Vodafone + IDEA) net debt by INR295b to INR811b, thereby reducing net debt-to -EBITDA to 3.9x on FY20E, assuming combined EBITDA of INR210b (including synergy gains). Fund-raising should provide Vodafone-Idea with much-needed liquidity to ramp-up network and protect market share against deep-pocketed peers, especially in the current hyper-competitive environment

Consolidated revenues came in lower at | 6509.6 crore (down 12.8% QoQ) vs. our estimate of | 6733.3 crore. The miss was due to the sharper impact of IUC cut. On the overall revenue front, the IUC cut had an impact of | 830 crore during the quarter. The resultant ARPU was at | 114 (down 13.6% during the quarter) vs. our expectation of | 120. Out of total ARPU erosion of | 18 during the quarter on a QoQ basis, | 14.5 was attributable to IUC cut while the remaining decline was owing to down trading. The voice volume usage continued to be...

We downgrade Idea to Neutral with TP of Rs 96 @ 8.5x Dec-19 EV/E (vs. Rs 120 @ 9x). Our TP is based on pro-forma financials of the merged entities. Ideas 3QFY18 numbers were weak as expected. IUC rate cut and subscribers downgrade to lower ARPU bundled plans impacted performance. Ideas high leverage, lower capex, lack of VoLTE readiness and integration hiccups puts Idea on weak footing in near term. Management refrained from competing aggressively in the tariff battle amongst Jio & Bharti. It would focus on voice only customers with limited data consumption till sanity prevails on pricing (a tough call?). We believe this may impact Ideas subscriber share and revenues.

IDEA's revenue declined 13% QoQ (-25% YoY) to INR65.1b (2% miss), while EBITDA fell 19% QoQ to INR12.2b. The impact on revenue/EBITDA on account of IUC rate cut was 11%/15%; the balance was due to ARPU down trading. However, lower cost (-11% QoQ) helped restrict the impact on margins (-130bp QoQ to 18.8%). Net loss widened to INR12.8b (est. of INR13.9b) from INR11.1b in the previous quarter. Bucking the trend of 2QFY18, gross subscribers grew 3% QoQ to 188.5m. Despite this, intense competition in the sector led to blended ARPU decline of 14% QoQ (11% impact on IUC). Voice/data ARPU dropped 5%/10% QoQ to INR85/INR95 due to a decline of 24%/26% in RPM/ARMB, offsetting traffic growth of 11%/30% QoQ.

Idea Cellular (IDEA) announced that the board has approved raising INR32.5bvia issuance of preferential shares to the Aditya Birla Group (ABG) atINR99.5/share, implying 9% equity dilution. The board is also considering raising additional INR35b, implying further 9% dilution. In our view, equity dilution will take away potential gains from existing shareholders, as the telecom market is likely to bottom out in the near term.At the same time, we believe that fund-raising should provide IDEA with much-needed liquidity to ramp-up network and protect market share against its deep-pocketed peers, providing an edge in the current hyper-competitive market. IDEA's FY18 net debt-to-EBITDA is estimated at a steep 9.3x. However, the combined net debt post the merger with Vodafone could drop by INR225b toINR871b, with net debt-to-EBITDA declining to 4.2x in FY20 and ~3x by FY21.

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. Ideas 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.