Event update: Vodafone Idea (Underperformer) - Risks outweigh reward. Remain negative
Key highlights from Vodafone-Idea analyst day
Market Outlook: Price levels are unsustainable and industry will go through a material price repair and believes that Rs170 of ARPU (Vs. Rs95 now) is possible. Management believes that 3 players market long term have potential to deliver EBITDA margins of 40% once price rationalisation sets in.
Strategy- Focus on profitable sub markets: The strategy centers around 1) accelerating synergy delivery, 2) investing in profitable areas, 3) Drive ARPU through upselling and 4) strengthen balance sheet (BS). Company is moving from circle centric execution to district centric execution as 303 districts contribute 86% of revenues and 138% of EBITDA. There are 276 districts that contribute 7% of revenues but consume 29% of EBITDA. Such districts will see moderate investments. Also the company is introducing common plans across India with minimum ARPU plan of Rs35 to stay on the network - effectively raising ARPU at bottom end.
Network investments: 4G pop coverage at 50% which should move to 70% pop coverage by FY19 and capacity should grow by 1.5x in 4 months. The capex guidance for FY19+FY20 stands at Rs270bn. The proposed capital raise, fiber asset sale (IDFCe : US$1.5-US$2bn) and impending Indus stake sale will provide funds for capex over the next 2 years.
Synergy target brought forward to FY21: Original synergy time frame brought forward by two years from FY23 to FY21. Management expects Rs84bn of opex synergies once full executed. This implies a proforma EBITDA (incl. synergies) is Rs123bn (Q2FY19 annualised).
View: Vodafone-Idea’s capital raise does provide room to undertake much needed capex but we don’t think it helps de-lever the BS nor it does give us confidence on their ability to win decisively in 4G. Strategy to focus on key districts is pragmatic one but does imply readiness to give away market share to competition. We build in RMS loss to 31% by FY21 from 40% in 1QFY19. Even assuming market repair and seamless synergy execution we still see fairly levered BS. Large dilution (~37%) on account of the capital raise further limits share price upsides. We move to Mar-20 target price of Rs28 (Rs48 earlier) set at 8x proforma EBITDA and builds in upcoming dilution. Re-iterate Underperformer.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.