INSUBCONTINENT EXCLUSIVE:
Motilal Oswal Securities has a buy call on Vodafone Idea with a target price of Rs 40.
The current market price of Vodafone Idea is Rs
29.90.
Time period given by the brokerage is one year when Vodafone Idea price can reach the defined target
Investment rationale by the brokerage:
Initiatives to drive synergy gains on track: Management cited that people/distribution synergies are
largely achieved and that it is on track in terms of achieving network-driven cost synergies
The company has already reduced overlapping sites by switching to loading-based sites
The work on the next leg of spectrum and radio integration (single equipment) is completed in 9 out of 22 circles; full completion will be
This has led to an increase in 4G population coverage to 65 per cent v/s 40 per cent at the time of merger
The target is to increase the coverage to 80 per cent
initiatives on network synergies, minimum recharge voucher program and accelerating shift from 2G to 4G should drive EBITDA growth
The company expects to achieve cumulative EBITDA of Rs 200b in the next eight quarters
Based on our workings, we estimate the 3QFY19 EBITDA run-rate of Rs 11.4b to reach Rs 37.1b in 4QFY21, factoring in (a) Rs 12b synergy gains
(Rs 78b opex synergy by FY21), (b) zero IUC gain v/s current estimate of Rs 4b and (c) Rs 17.7b from revenue-linked gains, led by the
minimum recharge voucher program, increasing shift to 4G and ARPU increase.
Preparing a wallet for capex, debt servicing: Vodafone Idea
requires Rs 600b of funds to incur toward (a) capex, (b) spectrum payment liabilities, (c) external debt servicing
and cumulative EBITDA of Rs 200b over the next eight quarters
Our workings indicate cumulative EBITDA of Rs 183b over the same period after including Rs 78b cumulative opex synergy and revenue-linked
This is subject to a market share loss going forward to the tune of 4-5 per cent
run-rate), Vodafone Idea may have only eight quarters of funding, with the net debt-to-EBITDA ratio likely to remain at a steep 8.4x
could be seen as an advantage by competitors
However, once the network and price arbitrage is reduced, the incremental market share shift should be arrested
We value the stock at Rs 40, 12x EV/EBITDA on EBITDA of Rs 126b in FY21
Our estimates factor in an ARPU increase of meager 3 per cent (which too will come in FY21)
Our positive stance is mainly premised on the healthy promoter backing and the strong operating leverage opportunity from any ARPU
