Voda Idea to expedite merger synergies

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Mumbai | Published: November 23, 2018 4:41:46 AM

Vodafone Idea, last week, had said that it will be considering a potential of upto Rs 25,000 crore of new equity capital.

The company is also exploring the sale of its fibre network (intra and inter-city) of over 156,000 km.

Vodafone Idea on Thursday said that it will expedite the merger synergies by advancing the target by two years to FY21, enhance 4G network expansion and deleveraging. The merged entity had earlier set FY23 deadline for completing the merger synergies. The company had set the synergy target at Rs 14,000 crore by avoiding duplication of sites. It said around 60% of the synergy gains, Rs 8,400 crore, will be in the form of opex reduction, majority of which (Rs 5,500 crore) will be achieved by minimising network opex. Here, Rs 1800 crore has already accrued with 66,000 site exits in July-September quarter. An additional 22,000 overlapping site exits and network integration should lead to further Rs 3,700 crore savings over 30 months.

The company is also exploring the sale of its fibre network (intra and inter-city) of over 156,000 km.
The company said that its combined capex guidance for FY19/20 stands at Rs 27,000 crore which would improve its 4G coverage to 80% and capacity by 2.5 times.

Vodafone Idea, which recorded a gross debt of Rs 1.26 lakh crore and a net debt of Rs 1.13 lakh crore and plans to raise Rs 25,000 crore expects that the proposed equity issue will be able to bring down the debt-equity ratio to healthy levels.

In its first interaction with the media post the completion of the merger of Vodafone and Idea, the combined entity’s chief financial officer, Akshaya Moondra said that the debt to equity ratio of 1.62 currently, will go to below 1:1, which is ‘healthy for any company’.

Vodafone Idea, last week, had said that it will be considering a potential of upto Rs 25,000 crore of new equity capital, and that this funding is required in order to ensure that the company has sufficient balance sheet flexibility to successfully execute its strategy. As part of such a capital raise, the promoter shareholders, Vodafone Group and Aditya Birla Group, would contribute up to Rs 11,000 crore and Rs 7,250 crore respectively.

The company board had also constituted a committee to evaluate various options including, but not limited to, a rights issue, qualified institutional placement and/or a preferential share issue. It is currently expected that any capital raise, if approved, is expected to complete by March 2019.

He added that the company’s deleveraging plan will be supported by potential capital raise, Indus stake proceeds and potential to monetise fibre assets.

However, Moondra said that the company’s net debt to Ebitda is ‘very high’ and is reflective of the situation where the capital structure of the company is strong but the current performance of the company as well as the entire industry is suffering. The company’s net debt to Ebitda, as on September 30, 2018, stood at 28.1 times, according to Bloomberg data.

“There is nothing that we can do in terms of bringing in equity to improve that (net debt to Ebitda). So in the interim, till the industry improves, shareholders are committed that in this situation it is important and their responsibility to provide adequate funding to business, so that all the investments that need to be made, all the strategic objectives that are there can be achieved,” Moondra said.

Commenting on company’s efforts to improve the Ebitda, he said while the company is working on generating cost synergies and taking Arpu improvement initiatives, a complete market recovery may take a while, which is a key factor in Ebitda improving.
On the capex part, Moondra said that it is a ‘misconception’ that Vodafone Idea has not invested enough.

“Prior to the merger announcement, collectively Vodafone Idea was investing more than the competition. However, because these investments were happening across two different entities with separate spectrum portfolios, the capacity generation out of those investments was not as great as it could be when the spectrum portfolios are combined”.

He added that now that the two are combined, it will actually become beneficial and will be able to generate lot more capacity than before.
On the observations by analysts that the company’s capex guidance is much below its peers, Moondra said that capex guidance and the coverage guidance is in sync with each other.

“This is our strategy and if it is going beyond a certain level, and it does not have economic returns, we are not going to go there. We want to be focused on returns”.

Brokerage firm UBS while commenting on Vodafone Idea’s fresh measures wrote, “While the recent fund raising initiatives and 4G network expansion are steps in the right direction, we believe earnings recovery may take time and uncertainty still remains on the timing of the monetisation initiatives and potential disruption in network as integration kicks in”. Similarly, a Bank of India Merrill Lynch report said that the strategy lags competition.

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