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MOSL: VODAFONE IDEA (Buy)-Bumpy road ahead

Vodafone Idea: Bumpy road ahead

(IDEA IN, Mkt Cap USD5.7b, CMP INR14, TP INR20, 43% Upside, Buy)

 

• Revenue changes its course: A stellar jump in APRU helped clear the major hurdle of a continued downtrend in revenue, which stood flat sequentially at INR117.8b (in-line) in 4QFY19. This, coupled with INR2b one-offs, led to strong EBITDA growth of 57% QoQ to INR17.9b. Interestingly, even adjusted for one-offs, EBITDA was up by a robust 39% QoQ (13% beat), primarily led by merger synergies (margin expanded 380bp to 13.5%). Adjusted for exceptional item and the DTA impact, IDEA reported a net loss of INR40.6b (v/s INR62.1b in 3Q).
• Concall highlights: (1) IDEA guided for capex of INR168b for FY20. (2) Net IUC EBITDA contribution stands at slightly over INR4b, which is likely to reduce to nil by 4QFY20. (3) Subscriber churn due to minimum recharge plans is still not over. (4) Network integration across circles will complete by Jun’20.
• Liquidity support to last for another 4-6 quarters: IDEA is surprising with faster-than-expected achievement of merger synergies (totaling INR51b by now). However, even after assuming additional INR1.5-2b quarterly synergy gains, we estimate EBITDA to reach INR85b by FY20, which is still significantly low compared to its ballooning net debt position of INR1,019b (FY20). We have factored in price increase in FY21, and thus, estimate EBITDA of INR132b for that year. This, coupled with INR250b rights issue and an estimated gain of INR50-60b from the Indus stake sale (not yet factored in the model), should help IDEA to service its bloated net debt, providing respite for additional 4-6 quarters, beyond which price increase will be key.