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MOSL: VODAFONE IDEA (Buy)-Sailing in rough waters

Vodafone Idea: Sailing in rough waters

(IDEA IN, Mkt Cap USD3.8b, CMP INR31, TP INR40, 29% Upside, Buy)

 

We attended Vodafone Idea’s Analyst Meet. Key takeways:

• Management reiterated that it remains focused on achieving synergy gains, working on ‘what is in own control’ to drive EBITDA, creating capacity to drive 4G subscription and readying funds for capex/debt servicing.
• The company continues facing challenges in the form of weak operating cash flows and high capex/leverage. However, management appeared very optimistic about riding the tide. 

Initiatives to drive synergy gains on track

Management cited that people/distribution synergies are largely achieved and that it is on track in terms of achieving network-driven cost synergies. The company has already reduced overlapping sites by switching to loading-based sites. The work on the next leg of spectrum and radio integration (single equipment) is completed in 9 out of 22 circles; full completion will be done by June’20. This has led to an increase in 4G population coverage to 65% v/s 40% at the time of merger. The target is to increase the coverage to 80%. This should expand current data capacity of 30 petabytes by 2.5x by March’20 and subsequently drive 4G absorption. 

Working on ‘what is in own control’ to drive EBITDA

While taking a tariff hike in the current market situation is unlikely, management indicated that its initiatives on network synergies, minimum recharge voucher program and accelerating shift from 2G to 4G should drive EBITDA growth. The company expects to achieve cumulative EBITDA of INR200b in the next eight quarters. Based on our workings, we estimate the 3QFY19 EBITDA run-rate of INR11.4b to reach INR37.1b in 4QFY21, factoring in (a) INR12b synergy gains (INR78b opex synergy by FY21), (b) zero IUC gain v/s current estimate of INR4b and (c) INR17.7b from revenue-linked gains, led by the minimum recharge voucher program, increasing shift to 4G and ARPU increase.