VIL Q3 results preview: Synergy benefits and funding progress to be watched

The telecom behemoth, which started announcing its merged results since the last quarter, is expected to show some improvement in ARPU

Merged telecom operator Vodafone Idea Limited (VIL) will be keenly watched for its commentary on the synergy benefits emerging from the merger, as well as its commentary on the Rs 25,000 crore fund raising plans during Q3 results.

The telecom behemoth, which started announcing its merged results since the last quarter, is expected to show some improvement in average revenue per user (ARPU) as its plans to weed out low ARPU users through minimum recharge plans complete a full quarter of operation.  There is expected to be some revenue decline after both VIL and Bharti Airtel introduced minimum Rs 35 recharges between late September and October across their circles in order to weed out extremely low ARPU subscribers, as well as, inactive SIMs.

“We expect 1.5% QoQ decline in revenue (on proforma basis) with ARPU improvement of 1.4% QoQ due to loss of subscribers, mainly low ARPU subscriber leaving the network due to the implementation of minimum recharge plan,” noted Shashi Bhushan and Santosh Sinha of Axis Capital in a report. The report further noted that the EBITDA would improve to 9% QoQ (+87 bps) due to synergy benefits.

Vodafone Idea posted a revenue decline of 7.1 per cent sequentially in the September quarter (it fell 2.2 per cent, while Jio’s revenue grew 14 per cent), while ARPU dropped 4.5 per cent to Rs 88 crore and subscriber count fell 3 per cent (by almost 13 million). TRAI data for October showed that VIL, as a merged entity, lost 7.36 million subscribers in the month, higher than their combined subscriber losses in the previous two months leading up to the merger.

“Comparable revenues are estimated to dip 2.7% QoQ on higher subscriber decline, and benefit of network integration is yet to show. We expect a synergy benefit of Rs 450 crore on account of a lower number of towers, and some saving accruing from remaining costs,” wrote Sanjesh Jain, research analyst ICICI Securities in a report. 

ICICI Securities expects VIL to report a net loss of Rs 4,000 crore in the quarter, while EBITDA growth is pegged at a marginal 1.2 per cent to Rs 1000 crore despite the synergy benefits.

During his first media address after the merger, VIL CEO Balesh Sharma had indicated that the company plans to enhance consumer benefits while reducing operational expenses (opex). By Q2, VIL had already given up almost 66,000 co-located tower sites. The next phase was to see the integration of tower sites that may be located close to each other to reduce costs. “We will take out about 10 per cent of the existing 200,000 towers through this initiative - meaning 40,000 more towers than what brand Vodafone subscribers had and 50,000 more towers for Idea subscribers, servicing both 2G and 4G customers without compromising on coverage capacity,” said Sharma, while addressing queries in November. 

According to the new strategy, the management plans to invest Rs 27,000 crore in 2019-20, supported by savings of around Rs 14,000 crore that it expects to come from synergising operations of merged entities. This includes around Rs 8,400 crore in opex and Rs 5,600 crore in capital expenditure, reports suggest.

Cost synergy is likely to be among the top concerns for the initial few quarters, and analysts expect some strong commentary on the same. “In addition to savings from tenancy exits, we factor in additional Rs 2,000 crore of annualised cost savings to accrue in the quarter. While this is a steep task, we expect the management to focus on costs in the initial quarters,” wrote Sunil Tirumalai, research analyst with Credit Suisse. 

Credit Suisse also expects timelines on recapitalisation plans and that VIL will try and monetise Indus stake (for cash) as soon as possible.

VIL has indicated a Rs 25,000 crore equity infusion in addition to tower and fibre asset monetisation plans going forward to continue the capex flow. Industry watchers see this as an indicator of extended competitive intensity and further price wars.

As such, VIL's capex spend remains significantly lower than its peers. Its Q2 proforma capex spend at Rs 3,300 crore was lower than Airtel's Rs 7,680 crore in the same quarter. Reliance Jio's capex remained higher at Rs 16,000 crore.

Highlights:
 

•       Cost synergy between Vodafone and Idea operations to be the top concern for the merged entity.

•       Analysts look forward to commentary on fundraising plans.

•       Some revenue loss expected due to loss of low ARPU subscribers.