Analyst Corner: Maintain ‘Buy’ on Vodafone Idea with a Target Price of Rs 37

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Published: February 23, 2019 12:27:18 AM

Company plans to gain market share in its strong circles with focused capex spend, as it expects its share in the net adds to go up. Management refrained from giving a timeline for sector revival.

Analyst Corner: Vodafone Idea: Maintain ‘Buy’ with a TP of Rs 37Analyst Corner: Vodafone Idea: Maintain ‘Buy’ with a TP of Rs 37

In the analyst meet, Vodafone Idea management reiterated its network integration is on track with full impact of synergy benefits expected in 2 years (by Q1FY21).

It has maintained its capex guidance (`270 bn in 2 years) as it expects cash position to improve from equity infusion, asset monetisation, ARPU improvement and synergy benefits. It sees market share stabilising at 30% (for 3+1 player market) as it expects to gain market share in its traditionally strong circles. Also, it expects ARPU to improve as 4G revenue share improves gradually.

Funding concerns to be alleviated by (i) `250 bn capital raise; (ii) sale of fiber network; and (iii) tower stake sale. Easing of competitive intensity will have stronger impact on the earnings of Vodafone Idea as (i) ARPU erosion subsides by FY20 and (ii) synergy benefits help improve margin. Maintain ‘Buy’ with a TP of `37.

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Company plans to gain market share in its strong circles with focused capex spend, as it expects its share in the net adds to go up. Management refrained from giving a timeline for sector revival.

However, it sees opportunity for growth by pushing the unlimited bundles. It expects market share to stabilise around 30% as it sees market size as optimal with 3 players. Global average is of 3 player market with Ebitda margin of 39%. Management also highlighted there is slow down in Jio phone landing in Idea network.

We expect competitive intensity to reach steady state, easing pressure on ARPU by FY20. Vodafone Idea to benefit from operating leverage as ARPU improves gradually from FY20.

The company has signed new credit agreement with vendors that could provide `60-bn benefit in the near term. Synergy to improve margin after the merger led by rationalisation of overlapping sites.

Company tried to allay funding concerns as it had `89 bn of cash at the end of December 2018, and expects (i) `250 bn from equity infusion; and (ii) `50 bn from Indus monetisation. Additional synergy benefit of `200 bn is also expected in 2 years.

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