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MOSL: VODAFONE IDEA LTD (Buy)-Faced with tough task of network integration/debt repayment

Idea Cellular: Faced with tough task of network integration/debt repayment; Fund raising may bring along some relief

(IDEA IN, Mkt Cap USD4.5b, CMP INR37, TP INR50, 36% Upside, Buy)

 

• Dismal quarter despite merger: Vodafone-Idea (IDEA) reported its first quarterly result post-merger (consolidating Vodafone India from 31st Aug 2018). Revenue/EBITDA came in at INR76.6b/INR4.6b. Adjusted for an INR4.1b exceptional item (net of taxes), the company reported a net loss of INR45.7b. On a pro forma basis (assuming Vodafone-Idea as a merged entity from 1st April 2018), revenue declined 7% QoQ to INR120.2b, impacted by a double-whammy of an APRU decline and a lower subscriber base. Consequently, pro forma EBITDA declined 29% QoQ to INR9.8b, with the margin down 250bp to 8.1%.
• Disappointing show on ARPU, subscriber addition: On a pro forma basis, ARPU declined 5% QoQ to INR88, which is ~13%/33% lower than that of Bharti/RJio (INR101/INR131). This, coupled with a 3% QoQ decline in the overall subscriber base to 422.3m, accentuated the impact on revenue. Although the data subscriber base was down 1% QoQ, the broadband subscriber base (3G+4G) increased 5% QoQ.
• Buying breathing space in a tough market: Although the merger has been concluded, bloated net debt of INR1,125b is concerning. The company is exploring equity funding options of INR250b (by 4QFY19) – of this, INR110b/INR72.5b will be contributed by Vodafone/ABG Group, while for the remaining amount, the company is evaluating external funding options. At CMP, this would imply a steep post-equity dilution of ~44%, with Vodafone/ABG Group’s promoter holding reset to 44.7%/27.3% (from current 45.3%/26.0%). If the equity funding goes through, then along with the current cash of ~INR136b and the tower stake sale value of ~INR53.7b, overall cash in the company could be ~INR440b. This could support capex plus interest paying capability for 10-12 quarters (incl. cash flow from operations and network synergies). Instead of a financial investor, if company is able to rope in a deep-pocketed strategic player, then it could lead to a turnaround in the industry’s competitive landscape.