MOSL: Morning India (21/Mar/17)-1. Idea Cellular (Merger Update)-2. HCL Technologies; 3. Gail India; 4. Colgate; 5. Utilities; 6. Oil & Gas; 7. Metals Weekly
​MOrning India (21/Mar/17): 1. Idea Cellular (Merger Update); 2. HCL Technologies; 3. Gail India; 4. Colgate; 5. Utilities; 6. Oil & Gas; 7. Metals Weekly
Idea Cellular: Vodafone, Idea get prepared to fight battle of capacity; Dominant position, synergy gains post-merger to drive EBITDA growth
The telecom battleground is all set to intensify with Idea and Vodafone announcing to merge their businesses in a deal that will create a telecom giant. The merged entity is valued at 8.3x on FY19E with an EV of INR1,779b – Idea will issue shares at a swap ratio of 1:1 to Vodafone India shareholders.
The deal will allow the merged company to command a leadership position in spectrum (with a 24% share) and broadband sites. This could lead us to revise up our revenue market share estimates (we have factored decline of 250-300bp for both the companies). The current sub-30% EBITDA margin could scale up to 36-39% over next 4-5 years, led by synergies and scale benefits. Furthermore, reducing capex requirement and tower sale could lower leverage to around 4x by FY19E.
We upgrade Idea to Buy with a target price of INR120, implying 9x EV/EBITDA on FY19E for the combined entity. In our view, rich valuation is justified, as the expected recovery from FY19 could drive EBITDA CAGR of 18% over FY18-22.
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