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MOSL: IDEA CELLULAR (Buy)-Near-term headwinds persist-High net debt of ~INR 1.2t in FY19E

Idea Cellular: Near-term headwinds persist; High net debt of ~INR 1.2t in FY19E may necessitate further cash infusion

(IDEA IN, Mkt Cap USD4.8b, CMP INR59, TP INR75, 27% Upside, Buy)

 

We met Idea’s management and conducted channel checks with network vendor. Our key takeaways:

• ARPU pressure continues due to downtrading 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.
• FY19E net debt stands at INR1.2t. INR300b cash from recent fund raising will be used to meet FY19E capex requirements and merger integration cost.

 Our view: Maintain Buy

• The stock is trading at 15x/9x on combined FY19/20E EBITDA. We believe headwinds from APRU downtrading would continue for the next few quarters. This coupled with delay in merger completion and risk of capital dilution lead us to reduce our TP to INR75 (INR85 earlier), assigning 10x to FY20E combined EBITDA of INR187b (including merger synergies).
• However, merger synergies should help tackle competition. Further, market recovery beyond FY19 should lead to a re-rating, triggered by FCF growth. Maintain Buy.
• Key Risk: Ballooning net debt and capex requirements beyond FY19 with limited OCF generation might necessitate further cash infusion.