Vodafone Idea's Q3FY19 results (Underperformer) - Risks outweigh reward. Remain negative
Q3FY19 Results Highlights
Inline Revenue, EBITDA beat: Pro-forma (full qtr) revenues at Rs117bn de-growth of 2.1% QoQ vs (IDFCe: Rs117bn), inline with estimates. EBITDA came at Rs11.3 bn growth of 16% QoQ (IDFCe: Rs10.2bn), due to lower network expenses & EBITDA margin came at 9.6% in Q3FY19, up 153bp QoQ on pro-forma basis. Reported PAT loss came in at Rs50.0bn against IDFCe of (Rs-54bn) loss.
Lower operating expenses led to EBITDA beat: Overall operating expenses for the quarter were lower sequentially due to the realisation of merger synergies. Q3 operating expenses were Rs. 81.5 billion (excluding licence fees & spectrum usage charges and roaming & access charges), lower by ~Rs. 7.5 billion (annualised ~Rs. 30 bn) compared to Q1 operating expenses. As a result, despite the reduction in revenue, EBITDA increased to Rs. 11.4 billion, a 16.3% improvement QoQ.
ARPU inline with our estimates, minimum ARPU plan led to loss of subscribers: Pro-Forma ARPU for Q2FY19 came at Rs.89 vs IDFCe : Rs.90, a increase of 1.1% QoQ(Q2FY19: Rs. 88). Minimum ARPU plan of Rs. 35 led to loss of 35.1mn subs QoQ to 387.2mn in Q3FY19 (Q2FY19: 422.3mn). 4G subs additions was at 9.5mn, total 4Gsubs at 75.3mn. As per the company, it experienced growth in daily revenue on MoM basis during Dec-2018, which continued into Jan-2019 and likely to sustain due to: (a) coverage improvement; (b) capacity enhancement; and (c) accelerated 4G customer addition.
Key Concall Highlights: 1) Expects right issue to get completed by Q1FY20, 2) Combined FY19E-20E capex guidance remains unchanged at INR270b , 3) Expect EBITDA improvement in the coming quarters despite decline in net interconnect revenue. 4) Company has realized~Rs 7.5 bn of synergy benefits as of Q3
Valuation & View
We expect Vodafone Idea to benefit from operating leverage as ARPU improves gradually from FY20. Synergy to improve margin after the merger led by rationalization of overlapping sites. Merger approval should provide Idea-Vodafone some cushion to improve network and improve participation in the 4G-data market; but equity value protection is highly dependent on their ability to delivery cost synergies and drive EBITDA even as they lose RMS. We believe that there are multiple fronts that Idea will have to fight on – synergies, capex, market share defence and balance sheet repair. Maintain Underperformer at Mar-20 target price of Rs. 30.​
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