Idea Cellular Ltd:Reduce,Leverage remains a concern
1Q FY18 EBITDA declined by 14% qoq and 38% yoy and net debt/EBITDA increasedfrom 5.5x in the previous quarter to 6.4x. This ties in with our investment thesis: lack ofadequate data spectrum and a leveraged balance sheet will prevent Idea from reapingthe full benefit of data growth. Idea continued to post losses in data subscribers; theselosses over last three quarters stood at c30%. Idea’s 4G market share at the end of Q1 isestimated at c5%, much lower than its pan India revenue market share of 19%. Grouploss widened to INR8bn driven by EBITDA decline and higher finance charges.
Key takeaways from earnings call. (a) The company does not plan to lead tariff cuts;however, it will continue to match competition and suggested its blended rate per minutewas 5% premium to market leader Bharti and this needs to come down. (b) Withapprovals in place from Competition Commission of India for its merger with VodafoneIndia (not listed), the company suggested that it could now plan the integration aspects.
Idea Cellular Ltd:Reduce,Leverage remains a concern。 (c) Management suggested that it plans to deploy Voice over LTE by 1H of CY18. Furtherplans to deploy 2300 MHz spectrum in 5 markets and 4G focus was more in top 8 circles(d) On feature phone, the company suggested it had no plans to get into any kind ofhandset financing schemes or handset subsidies; however, it plans to work with handsetvendors to bring down handset costs. In our view, incumbent telcos including Idea arerelying more on the handset ecosystem to bring down cost of smartphones and 4Gfeature phones to counter the recently announced 4G feature phone by Jio (not listed).
Stock outlook. We believe that despite having pan India 4G spectrum, Idea lacks datacapacity and this may prevent it from successfully competing with Jio and Bharti in thenear to medium term. With 58% of its subscriber base not on smartphones, Idea ismeaningfully exposed to any potential disruption in the feature phone market, particularlyafter the launch of Jio’s 4G feature phone. Prompt approvals by Competition Commissionof India are positive and the medium-term upside catalyst for the share price remains itsability to benefit from potential synergies. That said, the two organisations differsignificantly in terms of billing systems, network vendors and culture and integration maynot be an easy exercise. At the same time, contesting disruption by 4G new entrants willdemand seamless execution in coming days. We remain cautious as the balance sheetcontinues to deteriorate.
Our DCF-based target price increases to INR77 from INR58 largely because we factorin potential merger related synergies of INR14 per share. This coupled with higherEBITDA estimates offset the significant increase in leverage forecasts (which in turnexplains cuts to our EPS estimates, see Figure 5).
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