Idea Cellular results spur market keenness for merger with Vodafone

As Idea Cellular has reported weaker than expected numbers for the quarter ending December, analysts now expect the planned merger with Vodafone to be a saviour for the Aditya Birla Group company.

Its revenue dropped 12.8 per cent from the earlier quarter, to Rs 65.5 billion. Losses ballooned to Rs 12.8 billion.  

There were positive signs in the form of subscriber addition and reduction in churn rate. Analysts feel, though, there are multiple fronts where Idea needs to fight, such as capital expenditure, market share defence and balance sheet repair.

“As pressure in the sector continues to mount, synergies from the merger — expected to be complete by June — appear to be the only saviour for Idea,” says brokerage Motilal Oswal. Its report expects the combined entity’s earnings before interest, taxes, depreciation and amortisation (Ebitda) margin to be 30 per cent in FY20, on the back of a Rs 2.1-billion operating earnings synergy and better cost optimisation.

Idea says the merger is on track and likely to be complete by May-June. The company has already secured most of the approvals, including that of the National Company Law Tribunal. Next month, it will apply to the department of telecom for final approval.

Edelweiss says Idea will benefit from operating cost and capex synergies after the merger, but there are concerns about its relatively low capex and possible loss of market share by avoiding a price cut. The company might lose key customers as users consolidate their usage in one SIM.

This is in the backdrop of Reliance Jio having recently announced a number of new plans to increase the daily data limit to 1.5 Gb a day, forcing the incumbents to match the rates. Market leader Bharti Airtel has taken the Jio rates head-on but Idea has chosen not to participate in this battle. Its management believes these cuts are only for the short term.

Jio recently altered its pricing stance, after price increases in July and October last year. The Mukesh Ambani-owned company had increased the daily limit on its data bundles and is to increase this further. In a recent meet with analysts, Jio had indicated its intent to maintain a ‘value’ gap with the incumbents by leveraging its network capacity and investment plans, which should aid revenue-share gains.

Although Idea has raised its FY18 capex estimate to Rs 70 billion, from Rs 60 billion, this remains significantly lower compared to  Airtel’s earmarked Rs 250 billion.

Idea’s net debt at the end of the December quarter was Rs 557 billion. Annualised net debt to Ebitda is at an unsustainable 11.4 times. The plan for preferential allotment and further capital raising should bring it down by Rs 67.5 billion and the net debt to Rs 490 billion.

Vodafone’s net debt, by the merger agreement, has to be Rs 25 billion more than Idea’s, so that the expected net debt of the combined entity would Rs 1 trillion. Given the sharp erosion of operating profit in the quarter, net debt to operating profit for FY18 of the merged entity will be in high single digit.

Idea’s sale of stake in standalone towers, as well as 11.5 per cent stake in Indus should help bring down the debt level, by Rs 145 billion. This should bring down the overall net debt to operating profit number for the  merged entity to a manageable under-six times.

A PhillipCapital report says Idea’s operating performance is gaining traction, despite the recent rise in competitive intensity. Subscriber addition is improving and the company is focused on the merger and accelerating of synergistic benefit.