Event update: IDEA Cellular (Underperformer) - Capital infusion to create room for capex
Event
The board of Idea Cellular (Idea) has approved equity issuance to the promoter group to infuse capital of Rs32.5bn. Additionally, the board has constituted a committee to evaluate routes to raise additional equity of upto Rs35bn.
Key details
- Idea is to issue 326.6m shares to the company’s promoter group at Rs99.5/share leading to capital infusion of Rs32.5bn.
- The issuance on preferential basis will be to promoter group entities.
- The issue is expected to be completed by February 2018.
- With this issuance, promoter shareholding in Idea will increase from 42.4% to 47.2% post infusion.
- The board has also formed a committee to evaluate raising capital of upto Rs35bn. The potential routes include, among others, preferential issue, qualified institutional placement and rights issue.
- Idea has a net debt of Rs540bn as of 2QFY18.
Our view
Capital infusion was much needed in Idea, considering the company’s leveraged balance sheet and the need to catch up with incumbents on 4G networks (capex). However given the price, the capital infusion is highly dilutive (8%). There will be additional dilution of ~8% if they raise Rs35bn at Rs99.5/share. While the infusion will not impact Vodafone’s post-merger shareholding, Idea’s promoters will now need to buy ~2.5% from Vodafone (4.9% earlier) to raise their stake to 26% in the combined entity. We view the capital infusion as necessary (given impending network capex) but not sufficient enough to address our concerns on the company’s market share. Re-iterate Underperformer.
Idea Cellular provides Global System for Mobile Communications (GSM) based mobile services and related telephony services to individuals and businesses in India. The company operates through three segments: Mobility Services, which provides GSM based mobile and related telephony services; International Long Distance (ILD), which provides international long distance services; and Passive Infrastructure, which provides passive infrastructure services. Co. offers 2G and 3G services that comprise roaming arrangements; ILD and other services; and a range of mobile broadband devices, including dongles and 3G smartphones that provide 3G applications and data services.
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