MOSL: IDEA CELLULAR (Buy)-Merger to conclude sooner than anticipated-Risk of market share dilution reduced
​Idea Cellular: Merger to conclude sooner than anticipated; Risk of market share dilution reduced; synergies not fully factored
(IDEA IN, Mkt Cap USD4.8b, CMP INR89, TP INR110, 20% Upside, Buy)
- The Vodafone-Idea merger is likely to conclude by the end of FY18, much ahead of the earlier expectation of mid-FY19. This should reduce the risk of market share dilution; we had assumed cumulative market share dilution of 150-200bp over the next 2-3 years.
- Our channel checks with network vendors indicate that master rollout plans including network restructuring and fresh investments should kick off soon. We expect the combined entity's EBITDA margin to expand from the current 23-25% to 32% by FY20 and 36% by FY21. This is still lower than Bharti's 40% margin in FY16-17.
- We expect a revenue recovery from 3QFY18, by when ARPU downtrading should be largely complete, and GST impact and seasonal weakness would have passed. RJio's VoLTE feature phone launch at current pricing is unlikely to be disruptive and interconnect usage charge (IUC) limits freebies. However, IUC reduction remains a key risk to ARPU stability.
- Our pro forma workings for the merged entity imply EV/EBITDA of 8x (FY19E). Potential synergy gains could imply EV/EBITDA of 6.2x (FY20E) and 5.2x (FY21E). This is factoring 36% margin v/s Bharti's 40% EBITDA margin in FY16-17. We reiterate our Buy rating, with a target price of INR110.
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.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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