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MOSL: Idea Cellular (Buy)-ARPU down-trading hurts earnings-merger synergies to support in FY19

Idea Cellular: ARPU downtrading hurts earnings; merger synergies to support in FY19

(IDEA IN, Mkt Cap USD5.2b, CMP INR69, TP INR85, 24% Upside, Buy)

 

• 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 widened to INR41.7b in FY18 (INR4b in FY17).
• Concall highlights: 1) INR20b synergies are expected on day 1 of merger, primarily from rationalization of overlapping sites. 2) Merged company’s 270k 2G sites and 175k 3G sites are easily upgradable to 4G. 3) Given equity infusion and sale of standalone and Indus towers, IDEA is adequately funded for the medium term.
• Merger synergies raise hopes of a better FY19: We have cut IDEA’s revenue by 4% for FY19/20E, but increased EBITDA by 4%, building in merger synergies and cost-optimization benefits. For the combined entity, we expect revenue/EBITDA to decline 13%/15% to INR555.4b/INR115.8b in FY19, without building in any merger synergies in the first year. However, considering management guidance of the company deriving INR35b of total INR84b synergy gains in FY19, EBITDA could grow to INR150.8 in FY19. In FY20, we expect 11%/62% combined revenue/EBITDA growth, building in 30% EBITDA margin on the back of synergy gains and operating leverage from a market recovery. Our key concern is on net debt, which could potentially balloon to INR1,200b in FY19, as high capex and settlement charges may offset equity infusion of ~INR280b.