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Stay cautious on Idea, advise analysts

Ram Prasad Sahu & Puneet Wadhwa/Mumbai/New Delhi 21 Mar 17 | 03:53 AM
Related to : Idea Cellular Ltd
 Idea Cellular Ltd
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BSE   11 Dec 17 | 12:00 AM

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NSE   11 Dec 17 | 12:00 AM

95.75  -0.45 (-0.47%)

Despite the merger with Vodafone’s India operations which will create India’s largest telecom company, the rough ride will continue for some more time for shareholders at Idea Cellular.

Investors should tread with caution, as the sector has been one of the biggest wealth destroyers. And Idea isn’t significantly different from a long-term investor’s perspective. The stock, which listed in March 2007 at Rs 85 is currently hovering at around Rs 98 — a compounded annual return of under three per cent (over its IPO price of Rs 75 a share) that fails to beat inflation.

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The merger will take at least a year and a half to complete and both companies will operate as independent entities till this goes through. Analysts believe the pricing pressure the industry is going through will continue for at least the next two to three quarters, putting pressure on Idea’s financials.

It reported a net loss of Rs 383 crore in the December quarter; operating profit margin fell by a little over 500 basis points year-on-year, to 25 per cent. Tirthankar Patnaik, India strategist at Mizuho Bank, believes it would take another six to 12 months for pricing to settle; only then would it make sense to take a view on this sector.

Not surprising, then, that the stock, which had spurted 30 per cent since January, fell nine per cent on Monday. Analysts ascribe this to profit-booking after the sharp run-up and the muted near-term outlook for the sector. The market was also unhappy with the merger valuation, which pegs the per-share value at Rs 72.50 for Idea.

While Idea will face major headwinds over the next few quarters, a section of analysts believe investors could make money over the longer term if the merger benefits are as planned. They say the company had not been performing well, barring its eight leadership circles, and would face immense operational pressure. This would have led to further straining of the balance sheet.

So, gains from the merger will be multifold. It would help the combined entity to report profit in each of the country’s 22 circles, given the subscriber base, spectrum capacity and access to subscribers in metro cities. Further, the annual capital expenditure requirement, at Rs 15,000 crore (Rs 7,500 crore each for Idea and Vodafone) is expected to come down by about 20 per cent, leading to savings in cash.

Given the overlap in spectrum capacity, the merged entity can transfer a chunk of the voice capacity to serve its data network. More, the merged entity is looking at having a combined 3G/4G data capacity which is 25 times more than the current levels over the next three years. Giving it enough ammunition to fight the other two big players, Reliance Jio and Bharti Airtel. There will also be huge cost savings, pegged at $2.1 billion (Rs 13,700 crore) annually, a major boost to operating profits when the merger (synergy) benefits start flowing from 2020.

Though the combined debt would be over Rs 1 lakh crore and net debt to operating profit at 4.4 times on a trailing 12 months period, this is expected to come down to three times. The reduction will be aided by the synergies and the sale of standalone towers of Idea and Vodafone, as well as Idea’s 11.15 per cent stake in Indus Towers.

While the combined entity stands to gain, the consolidation should help bring back pricing power to the sector. Says Kunj Bansal, investment head at Centrum Wealth Management, “The consolidation will lead to only three big players in the telecom sector. As a result, hopefully, after a year of intense competition, the industry will regain its pricing power."

Tread carefully

Since its listing a decade ago, Idea hasn’t made any money for its investors, except for a brief period in April 2015 The merger will take at least a year and a half to complete and both companies will operate as independent entities till then Analysts said it would take another 6–12 months for pricing to settle down and only then would it make sense to take a view on this sector Some analysts believe investors could make money only over the longer term if the merger benefits play out as planned The merger will help the combined entity to report profit in each of the 22 circles; its annual capex requirement, pegged at about Rs 15,000 crore (Rs 7,500 crore each for Idea, Vodafone) is expected to come down by 20% There will also be cost savings of $2.1 billion annually

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