While synergy benefits are accruing, company is not yet out of woods; reinitiated with ‘Add’ rating and TP of Rs 16
After being compliance-restricted the past few months, we reinitiate our coverage on VIL with an Add rating and a fair value of Rs 16. We found the company’s Q4FY19 earnings print a mixed bag on headline numbers and reasonably good as far as delivery on controllable variables (cost synergies, network integration, etc.) is concerned. Prognosis remains uncertain with several plausible scenarios that can play out. Our fair value of Rs 16 and corresponding Add rating is based on one of the many plausible scenarios.
Q4FY19 earnings print – a couple of hits and a couple of misses
VIL reported consolidated revenues of Rs 117.8 bn for Q4FY18, flattish q-o-q Ebitda, adjusted for Rs 2-bn one-off in reported numbers, stood at Rs 15.9 bn, up from Rs 11.37 bn with bulk of the q-o-q Ebitda increase coming from build-up of cost synergies —these stood at Rs 12.8 bn for Q4 versus Rs 7.5 bn for Q3. Recurring PAT loss stood at Rs 39 bn, marginally lower than recurring loss of Rs 42 bn in Q3, aided by higher Ebitda. A quick look at how VIL’s Q4FY19 performance tracks on the key monitorables:
Revenue performance, absolute and relative—flattish q-o-q revenues implying a higher perday revenue (90 days in Q4 versus 92 in Q3) is an improvement from the declining trends seen for the past many quarters. However – (i) growth print is weaker than that reported by Bharti (+4% q-o-q) as well as R-Jio (+7% q-o-q) and hence weak on a relative basis, and (ii) revenue performance was aided by accretion from introduction of ‘minimum recharge construct’; revenues outside this remained under pressure.
In-market competitiveness – even as Bharti has not disclosed its Q4FY19 operating parameters yet, we believe VIL’s sequential MBB/LTE net adds (2.3 mn/5.4 mn) as well as data volume growth (+9% q-o-q) were weaker than both Bharti and R-Jio’s.
Cost synergy delivery—with Rs 51 bn annualised cost synergy delivered within three quarters of merger, VIL has done a good job on this front. Other integration aspects – network integration progress has impressed even as the larger circles are yet to be integrated. Good progress with no visible mishaps.
Reinitiated coverage with Add
From Rs 4 to Rs 40, we can present a plausible scenario for any fair value for VIL. We continue to refrain from taking an extreme view, either way and build a slow improvement in our model.