Vodafone Idea Rating ‘hold’ : Keeping resources and spend balanced

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Published: December 1, 2018 2:07:20 AM

We attended the maiden analyst meet of Vodafone Idea Ltd (VIL) and we would have liked to hear about big capex and ambitious plans on home broadband.

Vodafone Idea Rating ‘hold’ : Keeping resources and spend balanced

We attended the maiden analyst meet of Vodafone Idea Ltd (VIL) and we would have liked to hear about big capex and ambitious plans on home broadband. However, VIL has put out realistic plans wherein it has balanced resources and expenditure by prioritising investments that give immediate value. The company gave details on opex synergy benefits to the tune of Rs 84 bn per year and it has reduced the timeline to achieve this synergy by two years to FY21, which should ease some of the balance sheet stress. It also indicates much faster network integration than expected.

We see synergy benefits achievable, but it would need huge efforts to execute it within a specified timeframe. Apart from the minimum recharge plan, VIL is relying heavily on market repair for ARPU growth, which is reasonable, but timing remains uncertain. VIL has approved fundraising of Rs 250 bn and planned asset monetisation of Indus Towers’ stake and fibre assets — which it believes will be more than sufficient to meet cashflow gaps.

We have incorporated the merged entity’s financials in our model and accordingly, arrive at target price of Rs 42 (earlier Rs 53 for Idea Cellular) based on 8.5x FY21e EV/Ebitda. We have assigned a higher valuation multiple considering the higher sensitivity to ARPU revival. We maintain our Hold rating, and prefer Bharti Airtel in the telecom sector.

Entire synergy to materialise by FY21
VIL has confirmed an opex synergy benefit of Rs 84 bn pa and now expects it to materialise entirely by FY21 (vs. earlier guidance of FY23). Of total synergy benefit, Rs 55 bn will come from network and IT savings, which should be aided by the announced exit of 66K tenancies and future exit of 22K overlapping tenancies. Saving of Rs 12 bn should come from lower costs of subscriber acquisition and subscriber servicing. We believe most of the synergy benefit is doable, and faster synergy also means faster network integration.

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Network investments—leveraging existing assets
VIL is betting on strong spectrum holding and redeployment of redundant 4G sites to drive 4G coverage. It expects to increase 4G coverage to 70% (from current 50%) in four months on redeployment and 80% by FY20e. In comparison, Bharti’s to rollout FD-LTE on all 2G sites and RJio’s 4G coverage expansion to 99% by end-FY19. VIL is using dynamic spectrum refarming on all its 900MHz/1800MHz sites wherein it can dynamically allocate 2G/4G capacity based on requirement.

Focus to grow in 338 districts
VIL to prioritise its capex in the 338 districts which contribute 90% of revenues while selectively building network and optimising costs in the remaining 330 districts. These 330 districts drag Ebitda by 32% currently.

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