Analyst corner: ‘Hold’ on Vodafone Idea with target price of Rs 35

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Published: February 22, 2019 12:12:26 AM

Considering this, management’s aspiration of expanding overall capacity by 2.5x and 4G population coverage to >80% (from 50% currently) is underwhelming and may further drag market share.

Analyst Corner: ‘Hold’ on Vodafone Idea with target price of Rs 35Analyst Corner: ‘Hold’ on Vodafone Idea with target price of Rs 35

Our key takeaways from the Vodafone Idea (IDEA) analyst meet are: 1) With the proposed capital infusion of Rs 250bn, the company would have the war chest for carrying out the planned network investments and meet debt obligations. 2) The minimum ARPU plan is having a net positive impact with MoM improvement in revenue in December as well as January. 3) The integration process is on track to ring in `84bn in annual synergies by FY21. Although strategy execution as well as integration is encouraging, we maintain a cautious stance on the stock given the company’s underwhelming capacity expansion plans and high leverage. An early and sustained improvement in the industry ARPU is a key risk to our thesis. Maintain ‘Hold’ with a target price of `35.

Management highlighted that equity infusion (`250bn), monetisation of Indus Towers’ stake (`50bn) and EBITDA accrual (~`200bn) coupled with `130bn of cash balance will keep the entity adequately funded for the next two years despite capital needs for network investments (`270bn), spectrum payouts (`213bn), and external debt (`134bn). The company has also negotiated better terms with suppliers, which will mean that the outlay towards network investments will be `210bn while the remaining portion of ~`60bn would be vendor financing. In absence of a material divergence in EBITDA and one-off costs towards integration, we do not expect challenges pertaining to funding.

Although IDEA has a revenue market share of 36%, its share in the data volume market is a meagre 18% while its volume growth too has been lagging peers despite a low base. Considering this, management’s aspiration of expanding overall capacity by 2.5x and 4G population coverage to >80% (from 50% currently) is underwhelming and may further drag market share. Although merger synergies are likely to boost margins, relatively low data capacity and weak content ecosystem would challenge sustenance of revenue market share.

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