Published on 13/08/2019 12:15:59 PM | Source: Motilal Oswal Services Ltd

Option Strategy Vodafone Idea Ltd by Motilal Oswal

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Recovery hinges on network integration, cash position

* Subscriber churn continues to hurt: 1QFY20 revenue declined 4.3% QoQ to INR112.7b (7% below est.), led by continuing high subscriber churn (lost 14m subs QoQ). However, it was partly offset by a rise in ARPU of 4% QoQ to INR108 (est. of INR115) due to Minimum Recharge Plans. On pre Ind-AS 116 basis, EBITDA declined 31% QoQ to INR12.4b (v/s reported EBITDA of INR36.5b), with 420bp drop in margins as synergy gains were unable to insulate the decline in revenue. Adjusted loss on pre Ind-AS 116 basis stood at INR41.2b v/s INR40.6b QoQ (Adj. loss of INR42.3b on reported basis). Broadband subscribers remained flat QoQ at 110.5m, while 4G subs addition remained dismal at 4.1m.

* Concall highlights:

(1) Of the total INR80b synergy to be realized by Jun’20, 70% target synergies have been realized by Jun’19.

(2) Reiterated network integration across circles and 95% of 4G population in high potential districts by FY20.

(3) External debt of INR41b maturing in FY20 and INR42b debt in FY21.

* Sufficient cash to operate for the next 4-5 quarters: The current net debt/cash position stands at INR993b/INR212b; an additional INR100-120b could be raised through monetization of the Bharti Infratel stake sale and fiber assets, and another INR50b through cash flow from operation (CFO). Against this, VIL has estimated annual cash requirement of INR280b (capex of INR120b, debt repayment of INR42b and interest cost of ~INR120b) over the next two fiscals. Thus, the current cash plus additional monetization opportunity could optimistically suffice for the next 4-5 quarters. The efforts towards network integration, capacity expansion and merger synergies has been plausible and is expected to boost 4G coverage to 90% by Jun'20 - at par with competition. Until then, the subscriber churn coupled with cash flow crunch could risk the operating capability of the company.

* Valuation and view: We have cut EBITDA by 40% on pre IND-AS 116 basis for FY20/FY21E. VIL’s key worry is the debt trap with net debt to EBITDA of over 15x, thus, any fund raise would be utilized to service debts. The positives are strong promoter backing and operating leverage opportunity from any ARPU increase. But, it needs to manage the cashflow until its network stabilizes by Jun’20. We maintain Buy, with a TP of INR12, ascribing 8x to FY21 EBITDA.


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