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Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Opportunity in adversity
Idea’s stock fell by 27% after the merger announcement, reflecting revenue pressures, high leverage and regulatory uncertainties w.r.t. the merger. Revenue will see a sharp improvement in 2HFY18 as Jio will gradually reduce promotions; regulatory intervention could be a trigger. Launch of Jio’s VoLTE feature phone will hurt weak 2G operators, hastening SIM consolidation; this will be ARPU accretive for incumbents. TRAI’s 4QFY17 print indicates massive pressures on weak operators, resulting in easy 2G customer gains for incumbents in their markets of dominance. Idea’s reduced capex over FY18 doesn’t worry us; robust spectrum footprint with Vodafone will support long-term growth. Whilst cutting Idea’s FY18/19 EBITDA by 2%/3%, we increase our target price by 17% incorporating 13% growth in FY20E (9% earlier) led by benefits from the exit of weak telcos.
Competitive position: STRONG Changes to this position: STABLE Telecom revenue to bottom as soon as Jio holds >`300 price point Jio’s aggression, which led to 5% telecom sector revenue decline (AGR) in FY17, is moderating. As renewals of Jio’s first paid recharge commence on 18 July, we expect sustenance of the `309 offer, giving 84 days for 1GB daily data and free voice (status quo). This is unlikely to further pressure incumbents that are now winning back customers by matching Jio’s offers (`345-350 for 28 days). TRAI’s April 2017 active subscriber data shows 1% monthly subscriber gains for Airtel followed by 0.2-0.5% gain for Idea/Vodafone/Jio; weak operators lost 3% subscribers. Equipped to handle traffic surge led by VoLTE feature phone Idea has ample headroom to expand 2G capacity (can carry 50% higher traffic with existing 2G network) and match Jio’s `100-149/mo unlimited voice offers. This will hasten SIM consolidation and improve Idea’s ARPU. Rural will remain Jio’s weak point given network gaps and difficulty in seeding VoLTE feature phones. Reduced FY18E capex guidance not a concern Idea’s reduced capex guidance of `60bn in FY18 (`78bn in FY17) isn’t worrying. Idea-Vodafone’s complementary capex approach over FY18 will mean no major gaps; moreover, cumulative capex of Idea-Vodafone over FY18 exceeds that of Airtel, indicating no undercutting of spends. Valuations: Certainty of merger approval increases Idea’s near-term valuations, 7.8x FY19E EV/EBITDA, don’t factor in easing competitive pressure. Street’s excessive pessimism in Idea will temper as revenue growth returns; expect 15% YoY growth over 2HFY18. Idea’s near-term valuation will be influenced by (a) Jio’s freebies; we expect gradual reduction from 3QFY18; (b) merger clearances (expect closure by mid-2018). Key risks: Capital infusion in weak telcos, lobbying by Jio to continue freebies.
CHANGE IN STANCE IDEA IN EQUITY June 23, 2017
Idea CellularBUY
Telecommunications
Recommendation Mcap (bn): `289/US$4.5 6M ADV (mn): `2,406/US$37.3 CMP: `80 TP (12 mths): `105 Upside (%): 31
Flags Accounting: GREEN Predictability: RED Earnings Momentum: RED
Catalysts
15% YoY revenue growth in 2HFY18E due to reduced discounts from Jio
Calibrated withdrawal of weak operators from several circles resulting 14% subscriber growth over FY19E
Performance (%)
Source: Bloomberg, Ambit Capital Research
60
80
100
120Ju
n-16
Aug
-16
Sep-
16
Nov
-16
Dec
-16
Jan-
17
Mar
-17
May
-17
Jun-
17
Sensex Idea Cellular
Research Analysts
Vivekanand Subbaraman, CFA
+91 22 3043 3261 [email protected]
Key financials Year to March ( bn) FY16 FY17 FY18E FY19E FY20E
Net Revenues 359.5 355.8 354.0 397.2 448.9
Operating Profits 119.7 102.8 98.1 109.5 133.9
Net Profits 22.9 (4.0) (17.8) (9.6) 3.5
Diluted EPS (`) 7.4 (1.2) (4.9) (2.7) 1.0
RoCE (%) 6.2 1.5 1.3 1.7 3.7
P/B (x) 1.2 1.2 1.3 1.3 1.3
EV/EBITDA (x) 5.6 7.7 8.2 7.8 6.1
Source: Company, Ambit Capital research
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 2
Telecom revenue to bottom in 1HFY18 Jio’s freebies resulted in a sharp revenue decline for the telecom sector; adjusted gross revenue declined 14% in 2HFY17. This triggered regulatory/Government concerns owing to falling tax collections and a potential debt crisis. Diminishing benefits (as seen in Apr’17 subscriber data) from promotions and potential regulatory intervention will prevent Jio from continuing aggressive freebies beyond 1HFY18. Thus, telecom sector revenue is likely to bounce back in 2HFY18 with significant gains accruing to incumbent telcos. Jio started charging telecom subscriber data, indicating that incumbents won back customers by giving counter offers.
Massive revenue pressures; weak telcos wilt
Jio’s free trial, unveiled in Sep’16, resulted in sharp stress for the telecom sector. 2HFY17 telecom sector AGR declined by an unprecedented 14%; Jio’s impact was most profound in 4QFY17 as it gained increased acceptance with freebies.
Exhibit 1: Telecom sector revenues recorded its sharpest decline
Source: TRAI, Ambit Capital research
Incumbents fare better than weak telcos...
In 2HFY17, whilst AGR declined for all telcos, incumbents were impacted much less than weak telcos such as Aircel, Tata and RCom. AGR for incumbents declined by 8-10% while it declined by 20-21% for Tata Teleservices, Telenor and Aircel. RCom fared disastrously as its AGR declined by 42%.
Exhibit 2: Telecom AGR posted a sharp decline in 2HFY17
Source: TRAI, Ambit Capital research
-30%
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10%
20%
30%
2QFY
09
4QFY
09
2QFY
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4QFY
10
2QFY
11
4QFY
11
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12
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4QFY
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2QFY
14
4QFY
14
2QFY
15
4QFY
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2QFY
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4QFY
16
2QFY
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4QFY
17
Gross revenue AGR
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afon
e
Idea
BSN
L/M
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Sect
or
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Tata
Air
cel
Rcom
Adjusted gross revenue (AGR) is gross revenue (GR) minus interconnect usage charges (IUC). We believe that AGR is a more accurate measure of telecom sector revenue that GR given that it eliminates double-counting of IUC revenue.
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 3
…as they unveiled counter offers
To counter competitive threats, incumbents rolled out two plans:
Unlimited on-net voice plan at `146-149 with 300MB of data for 28 days. Weak telcos which hitherto benefited from fragmentation of spends across SIM cards were hurt the most by such offers. Low ARPU customers stopped recharging their second SIM as they chose unlimited on-net voice offers of incumbents. High IUC bill for weak telcos prevented them from undercutting incumbents’ offers.
During Mar-Apr’17, Jio unveiled its ‘Summer Surprise’ `303 plan (total cost of `402 including Jio Prime membership) providing unlimited calls and 1GB daily data allowance for 84 days. Later, Jio marginally revised its price upgrades to `408 ‘Dhan Dhana Dhan’ offering the same benefits. Initially, incumbents matched Jio’s plan with a `346-349 plan. Through 1QFY18, they reduced the validity of the plan to 28 days.
Exhibit 3: 4QFY16 AGR market share
Source: TRAI, Ambit Capital research; Note: Idea and Vodafone are merging. Airtel has acquired Telenor India. Aircel-RCom-MTS are merging.
Exhibit 4: Incumbents gain market share; 4QFY17 AGR
Source: TRAI, Ambit Capital research; Note: Idea and Vodafone are merging. Airtel has acquired Telenor India. Aircel-RCom-MTS are merging.
These offers allowed incumbents to gain revenue market share at the cost of weak telcos. Airtel’s market share gains were the highest as the company aggressively cut rates ahead of Idea/Vodafone to capitalize on the losses of weak operators.
Exhibit 5: Airtel voice revenue per minute (VRPM) is now at a 6% discount to Idea
Source: Company, Ambit Capital research
Airtel, 31.4%
Vodafone, 22.8%
Idea, 20.0%
BSNL/MTNL, 6.9%
Tata, 6.8%
Telenor, 2.2%
Aircel, 5.2%
Rcom, 3.6%
Others, 1.1%
Airtel, 33.5%
Vodafone, 23.5%
Idea, 20.7%
BSNL/MTNL, 6.8%
Tata, 6.1%
Telenor, 2.1%
Aircel, 4.4%
Rcom, 2.4%
Others, 0.5%
-8%-6%-4%-2%0%2%4%6%8%
20.0
24.0
28.0
32.0
36.0
40.0
1QFY
15
2QFY
15
3QFY
15
4QFY
15
1QFY
16
2QFY
16
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17
4QFY
17
Airtel Idea Airtel VRPM premium to Idea - RHS
Paise/min (VRPM)
The `346-`349 plan by incumbents is a temporary move; we expect the same to be scaled down as Jio’s offers gradually reduce.
Airtel’s aggression was acknowledged by Idea in its 4QFY17 earnings call ‘surprisingly, the leading (number one Indian telecom operator) decided to turn aggressor and dropped its voice rates as well as mobile data rates much faster than Idea. The Company, while matching all market moves, has decided not to lead the rate drop. Idea, as a policy, will always follow any aggressive paid moves including unlimited plans by the new entrant on 4G devices, or introduction of new discounted plans by number one Indian mobile operator. Therefore, company’s results may have a lag factor by a week or fortnight.’
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 4
Revenue pressures most intense in metros
Given 4G smartphone users’ metro-centric nature, Jio’s freebies hurt telecom sector revenue in metros. Incumbents’ unlimited on-net plans sharply curtailed multi-SIM behaviour amongst consumers, resulting in a massive 47% AGR decline for weak telcos. In metros, Idea was hurt less than Airtel/Vodafone owing to its lower market share amongst smartphone users. Needless to say, telecom revenue was worst hit in the metros, declining 35% YoY in 4QFY17.
In A circles, telecom sector revenue declined 20% in 4QFY17. AGR declined 14-15% across the three incumbents. Again, weak telcos fared worse than incumbents, with revenue declining by 32%. In 3QFY17, Idea and Vodafone fared better than Airtel in A circles.
Exhibit 6: Metros were most affected by Jio’s onslaught
Source: TRAI, Ambit Capital research; metros comprise Delhi, Kolkata and Mumbai
Exhibit 7: In A circles, Airtel-Idea-Vodafone witnessed similar revenue trends (AGR data)
Source: TRAI, Ambit Capital research; A circles comprise AP, Gujarat, KTK, Maharashtra and TN
In B circles, revenue pressures were higher for Idea given its high share of smartphone users in these markets. Airtel’s outperformance in these markets stands out, reflecting the company’s aggressive market participation (as acknowledged by Idea). In 3QFY17, Vodafone was the best performing incumbent telco in C circles as it reaped benefits of 900MHz spectrum in Odisha. Revenue trends in 4QFY17 were similar for the three incumbents.
Exhibit 8: Amongst incumbents, Idea was most affected in B circles
Source: TRAI, Ambit Capital research; B circles include Haryana, Kerala, MP, Punjab, Rajasthan, UP-E, UP-W and WB
Exhibit 9: In C circles, Vodafone was able to do much better than rival incumbents
Source: TRAI, Ambit Capital research; C circles comprise Assam, Bihar, HP, J&K, NE and Odisha
-50%
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Airtel Idea Voda Weaktelcos
Sector
3QFY17 4QFY17
AGR growth
-35%
-30%
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-15%
-10%
-5%
0%
5%
Airtel Idea Voda Weaktelcos
Sector
3QFY17 4QFY17
AGR growth
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10%
Airtel Idea Voda Weaktelcos
Sector
3QFY17 4QFY17
AGR growth
-25%-20%-15%-10%-5%0%5%
10%15%20%25%
Airtel Idea Vodafone Weaktelcos
Sector
3QFY17 4QFY17
AGR growth
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 5
Apr’17 data shows diminishing benefits from promotions for Jio
Jio has succeeded in securing market leadership of broadband subscribers…
Since launching services in Sep’16, Jio has managed to garner a very high proportion of incremental broadband subscribers. On a pan-India basis, Jio garnered 78% of incremental broadband subscribers over Jun-Dec’16. Jio has done particularly well in A circles where it accounted for 87% of incremental broadband subscribers. As of April 2017, Jio had a 38% market share amongst top-5 broadband subscribers. Jio has been able to garner market share on the back of freebies and gargantuan data allowances (1GB/day versus 1GB/month average usage).
Exhibit 10: Jio garnered a large share of incremental broadband subscribers (Jun-Dec’16) across circles…
Source: TRAI, Ambit Capital research; assumed VLR (active) subscribers.
Exhibit 11: …and has the highest market share of broadband subscribers (April 2017)
Source: TRAI, Ambit Capital research; * assumed VLR subscribers for Jio
…and carries much higher data than incumbents but trails in voice
Jio’s freebies enabled consumers to guzzle data; average data consumption is 12.5GB/month compared to 0.9GB/month for Idea and 1.3GB/month for Airtel. Voice consumption of Jio’s customer base stood at 749 minutes/month compared to 471 and 412 for Idea and Airtel.
Exhibit 12: Jio trails incumbents on voice network usage (4QFY17)…
Source: Company (4QFY17 data), Ambit Capital research
Exhibit 13: …but carries 6.4x the data of Airtel-Idea-Vodafone combined (4QFY17)
Source: Company, Ambit Capital research; data usage/sub computed on Jio’s VLR subscribers
0%
20%
40%
60%
80%
100%
Metros A circles B circles C circles Total
Jio*, 80 , 38%
Airtel, 50 , 24%
Voda, 40 , 19%
Idea, 24 , 12%
Rcom, 14 , 7%
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bn mins/qtr MOU/sub (RHS)
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Airtel Idea Jio Rcom Voda
mn GB/quarter Data usage/sub (GB) - RHS
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 6
Incumbents are faring quite well after Jio started charging
Whilst Jio started charging for its services from 15th April, it offers unprecedented quantum of freebies as well as a long-validity (84 days). Incumbents were able to gain subscribers as they gave counter offers matching Jio’s. Meanwhile, weak telcos continue to wilt, reporting a sharp (3-4%) decline in active subscribers.
Exhibit 14: Incumbent telcos gained active subscribers (Apr’17) as Jio started charging
Source: TRAI, Ambit Capital research
Regulatory intervention could force Jio to reduce freebies…
“The pricing…is unsustainable. 1GB a day (of data) for that price (`309) is pretty low. It is better than zero (free services)" – Sunil Mittal, Chairman, Bharti Enterprises
In Feb’17, the regulator unveiled a consultation paper titled ‘Regulatory Principles of Tariff Assessment.’ The authority is reviewing the following tariff matters: non-discriminatory tariffs, promotional offers, anti-competitive tariffs, market dominance (on parameters such as subscriber base, turnover, switching capacity and traffic volume) and Significant Market Power (SMP). The regulator’s imminent recommendations/orders could impose constraints on telcos (including Jio) from rolling out or persisting with aggressive offers. Below is a snapshot of responses by key telcos.
Incumbent telcos want the Government to bar operators from pricing services below IUC. In its response to the TRAI’s consultation paper, Airtel highlighted the asymmetry in voice traffic due to Jio; 93% of Airtel’s call volumes with Jio are incoming minutes, implying just 7% outgoing minutes. Airtel says that this is due to Jio’s free voice offers that are predatory in nature. Airtel believes that the cost of voice services is `0.35/minute, implying a loss of `0.21/min for each net incoming minute (as captured in the MOU differential).
Other requests of incumbents include flexibility to give customized offers to consumers and categorization of 4G services as different from 2G/3G in ascertaining discrimination of tariffs/predatory pricing/exercise of SMP.
On the other hand, Jio is pressing for greater transparency in tariffs and a total ban on custom offers. Jio believes that the regulator mustn’t differentiate telcos by technology and must consider the definition of markets as outlined in license conditions (access services, NLD/ILD etc.). On the subject of predatory pricing, Jio believes that new technologies allow for many services to be provided free, hence it advocates continuation of price forbearance.
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
(4.0)
(3.0)
(2.0)
(1.0)
-
1.0
2.0
Air
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Tele
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+V
odaf
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Tata
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-Rco
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mn subs added Monthly growth (%) - RHS
Our channel checks indicate that since Jio made its service paid, incumbents’ month on month revenue decline (as witnessed over 2HFY17) has reversed.
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 7
Exhibit 15: Airtel highlighted significant traffic differential with Jio…
Source: TRAI (Jan 2017 data), Ambit Capital research
Exhibit 16: …resulting in losses as the company believes that the 0.14/min IUC is below cost (`0.35/min)
Source: TRAI, Ambit Capital research
Exhibit 17: Telcos’ views on key issues pertaining to regulating tariffs. Issue Airtel Idea Vodafone Rjio
Non-discriminatory tariffs
In a 'calling party pays' regime, IUC compliance is vital as telcos can use competitors' networks and resort to predatory/below-IUC pricing.
Tariff review incomplete without reviewing the issue of IUC compliance 4G customers must be treated as a separate class from 2G/3G customers as 4G is more efficient than 2G/3G and allows operators to provide much more benefits than 2G/3G. Incentivisation of 4G handset upgrades should be seen positively.
Refrained from commenting on
this subject as the company
highlighted that this matter is subjudice.
More transparency is needed. No custom offers should be permitted.
Promotional offers Promotions shouldn't exceed 90 days. IUC compliance should be seen as a driving factor.
Present regime doesn't take into account the implications of bundling Promotions should comply with TRAI's principles of IUC and must cover the same. No promotions should be allowed at rates lower than IUC cost. Also, promotions shouldn't exceed 90 days.
For effective competition promotional offers must be permitted. This is also crucial to drive adoption of new technologies.
Assessing SMP and anti-competitive behaviour
Issues related to SMP are distinct from IUC and predatory pricing. Airtel suggests that the regulator must define markets on the basis of services such as voice, text, data etc.
In addition to factors mentioned by the TRAI, Idea believes that SMP should also be assessed on traffic market share in data, spectrum market share in a band, network coverage catering to smartphones and broadband sites vis-à-vis industry.
Convergence of technology means that looking at technologies is misplaced. Relevant markets must be defined as Access, NLD and ILD Markets, as prescribed in the licence. No need to further sub-divide markets.
Assessing predatory pricing
Offers below IUC cost must be considered as instances of predatory pricing.
Offers below IUC cost must be considered as instances of predatory pricing.
Adoption of newer technologies, convergence of networks and services mean that there are many services that can be offered free of cost. The regulator doesn't need to scrutinise the industry on this matter. Price forbearance is the best option.
Source: TRAI, Ambit Capital research; IUC = Interconnect Usage Charge, SMP = Significant Market Power, NLD/ILD = National/International Long Distance
As per media reports, the regulator is likely to unveil its recommendations on this subject by Aug’17.
…as alarm bells are ringing in the Government
The Telecom Commission, a decision making body advising the Telecom Ministry, wrote to the Finance Ministry requesting it to slash the telecom department’s non-tax revenue target for FY18 by 38% citing severe financial stress faced by the industry. The Government setup an inter-ministerial panel (IMG) to examine financial challenges faced by telcos. Last week (12th June), the IMG met telcos and banks to discuss the sector’s issues:
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Jio Idea Voda
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Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 8
Jio stated that telcos need to infuse equity in the business, retire debt and invest in new technologies. Incumbents are pressing for the need for Government to intervene and announce floor tariffs.
The unanimous demand was to reduce taxation and regulatory costs; GST rates, Universal Service Obligation Fund (USOF) contributions, license fee and spectrum usage charges. The COAI also wants a five-year moratorium on deferred spectrum payment as against the current practice of two years. Also, some telcos wanted the repayment period of the deferred spectrum payments to be extended to 20 years from 10 years currently.
The Telecom Minister is scheduled to meet the heads of telcos on 25th June. In a recent media interview, the Telecom Secretary mentioned that the IMG has been given three months to assess what the telecom industry requires from the Government.
Given the distressed state of the sector, the following respite measures could be offered by the Government:
Respite in the form of rapid approvals for mergers/spectrum sharing/trading deals – very likely in our view
Change in moratorium and repayment period on deferred spectrum payments – somewhat likely
Reduction of license fee, USOF contributions, spectrum usage charge and GST rate – rather unlikely.
Jio’s pricing aggression to reduce; to focus on network quality
Summer Surprise plans up for renewal in the 3rd week of July 2017
The first lot of paid users (who enrolled by 15th Apr’17) will have to renew their Jio plan in the 3rd week of July. Whilst our channel checks indicate a high degree of success for Jio in getting free trial users to pay, the same is questionable if Jio reduces the validity of its `309 1GB/day and unlimited voice calls plan (current validity is 84 days). Thus, on renewal in the 3rd week of Jul’17, we expect Jio to persist with the current validity for the `309 plan by announcing a possible ‘Jio Monsoon Hungama.’
Focuses shifts to improving the network
Whilst Jio retains customers on long-validity paid plans, it is fixing network choke points. Our channel checks indicate that Jio is aggressively rolling out new network sites and debottlenecking existing ones. Keeping in mind the time sensitive nature of rollouts, Jio is rolling out on 3rd party towercos; 5-6 days of site rollouts on 3rd party towercos versus 2-3 months for captive rollouts. Jio seems to be adopting a strategy of improving network quality and delivering on its outlandish data allowance commitments (1GB/day) to customers. This is in keeping with the company’s commitment of doubling network site count to 200,000 by FY18.
As Jio reduces validity in 2HFY18, customers will opt for one data connection
The high proportion (80% over Jul-Dec’16 on VLR basis) of the telecom industry’s incremental broadband subscribers indicates that most of Jio’s subscribers remain incumbents’ data subscribers. With incumbents matching Jio’s offers, data users have been able to get a significant data allowance and unlimited voice calls spending `650-700 for three months. As Jio reduces the validity of its data offer to 56 days and eventually 28 days, we expect customers to choose between incumbents’ plans and that of Jio. For Jio, network quality upgrades and customer service will play a key role in transitioning from the current promotional mode to a full service mode.
Jio’s Summer Surprise users will need to renew their plan in the 3rd week of Jul’17
Source: Ambit Capital Research
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 9
Incumbent telcos to benefit from losses of weak telcos
Weak telcos are getting cornered
Challenges for weak telcos are multi-fold; rapidly shrinking revenues hurt by Jio and incumbents’ SIM consolidation plans (unlimited voice offers), escalating interest cost and inability to invest in networks (3G/4G). Our channel checks indicate that the reduction in revenue is hurting weak operators so much that they are unable to even honour obligations of day-to-day vendor payments. This will translate into reduced competitive pressures in the mass market 2G segment.
Exhibit 18: Weak operators lose subscriber market share
Source: TRAI, Ambit Capital research
Exhibit 19: And also AGR market share
Source: TRAI, Ambit Capital research
Is a strategy of exit from weak markets and sale of spectrum the way out?
Given the high fixed cost nature of the telecom, operators are likely to break even only if their revenue market share is in excess of 10%. Aircel + RCom have double-digit revenue market share (RMS) in five circles - Assam, HP, J&K, North East and Tamil Nadu. Tata Teleservices has double-digit RMS in four circles, Haryana, Karnataka, Kolkata and Mumbai. Both operators are unable to provide 4G services due to spectrum and funding constraints.
Exhibit 20: Tata Tele and Aircel+RCom have double-digit revenue market share (AGR) in very few circles
Source: TRAI, Ambit Capital research; AP = Andhra Pradesh, Guj = Gujarat, H.P. = Himachal Pradesh, Hry = Haryana, KTK = Karnataka, KL = Kerala, Kol = Kolkata, M.P. = Madhya Pradesh and Chhattisgarh, Mah = Maharashtra, Mum = Mumbai, Ods = Odisha, Pun = Punjab, Raj = Rajasthan.
For Aircel + RCom and Tata Teleservices, exiting from low market share, unprofitable markets may be the best option. In these circles, the two operators could potentially sell their spectrum to incumbents/Jio. In the past, Aircel has taken such steps; they sold 2300MHz spectrum across 8 markets to Airtel.
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Aircel Rcom Tata Tele Telenor
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.
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U.P
.(W)
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.
Tata Tele Aircel+Rcom
In FY17, HFCL (Quadrant), which had a 10% subscriber market share and 3% AGR share (FY16) exited the business.
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 10
Jio’s VoLTE feature phone not a worry Given the lack of a sub-GHz network and handset constraints, Jio has been absent from rural areas. Imminent VoLTE feature phone launch by Jio isn’t a cause of concern as voice remains a strength area for incumbents owing to circuit switch fallback support (2G/3G). Unlimited voice calls at `100-150 could drive demand and accentuate SIM consolidation, improving incumbents’ ARPU as low-value customers consolidate spends. Moreover, voice capacity isn’t a constraint for incumbents given availability of spare 2G sites as a result of single RAN base station rollouts since 2QFY15. On the voice capacity front, Idea seems more comfortably placed than Airtel owing to its lower traffic metrics (24% lower than Airtel).
Rural areas remain Jio’s weak point Given low penetration of 4G LTE smartphones amongst rural subscribers and network availability issues, Jio has been unable to make an impact in rural areas. As of Dec’16, rural subscribers comprised merely 6% of Jio’s user base. This compares with 41%, 49%, 54% and 55% for the telecom industry, Airtel, Vodafone and Idea respectively.
Exhibit 21: Rural subscribers as a proportion of total users (Dec’16)
Source: TRAI, Ambit Capital research
Jio to set up an 800MHz network and launch inexpensive VoLTE phones
In the FY15 and FY17 telecom spectrum auctions, Jio was able to acquire 800MHz spectrum in 13 of India’s 22 circles. It is yet to orient this network for rural coverage. The company also signed spectrum sharing and spectrum trading agreements with Reliance Communications to complete pan-India 800MHz spectrum footprint. Jio is awaiting clearance from the Competition Commission of India. In addition, media reports mention Jio’s plans to roll out 4G VoLTE-enabled feature phones at `999-1,800. Media reports indicate the following about Jio’s 4G feature phones
Jio is looking to launch two variants under the LYF brand. One with a Qualcomm 205 chip and another with Spreadtrum chip.
The phone could have the following specifications - 2.4 inch display, 2 MP front and rear camera, WiFi and Bluetooth connectivity. It could have 512 MB of RAM, 4GB storage and a microSD slot for expansion of memory.
We also point out that Jio’s inexpensive VoLTE phones are not a guarantee of success. Adoption could be weak as witnessed in the case of LYF smartphones which have a paltry 3% market share as of 4QFY17.
0%
10%
20%
30%
40%
50%
60%
Air
tel
Air
cel+
Rcom
BSN
L/M
TNL
Idea Jio
Tata
Tel
e
Vod
afon
e
Indu
stry
As of Dec’16, Jio’s market share among rural subscribers is <1%, much lower than its 6% market share of industry subscribers.
`1,000-1,200 is the sweet spot for pricing feature phones, lower than the currently landed price of ~`2,000. If Jio were to subsidise handsets and give a lock-in then it would be challenging to attract subscribers, akin to challenges faced by Reliance in its CDMA launch in 2003.
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 11
Exhibit 22: Jio’s VoLTE feature phone launch appears imminent
Source: Media reports, Ambit Capital research
Idea has ample voice capacity to handle potential traffic surge
Once Jio launches low-cost 4G VoLTE feature phones, it could aggressively promote its `149 unlimited voice and 2GB data plan (valid for 28 days). Incumbents have matched this price point giving unlimited on-net calling. Nonetheless, price cuts could be in the offing. Resultant surge of voice traffic can be easily handled by Idea. At 0.54mn minutes/month, Idea’s voice traffic is 24% lower than that of Airtel, implying ample room to accommodate more traffic. Vodafone recently mentioned that single RAN base station rollouts have resulted in many legacy 2G network sites getting freed up. From 3QFY15, Idea has added ~24k 2G base stations and 85k 3G/4G base stations. Assuming a conservative 20% 3G/4G site addition in the form of single RAN base stations (also capable of handling 2G GSM), we estimate Idea to have freed up ~12k legacy 2G sites which can be redeployed to cater to voice traffic surge.
Exhibit 23: Idea’s 2G capacity has ample headroom
Source: Company, Ambit Capital research
Exhibit 24: Idea added many single RAN base stations
Source: Company, Ambit Capital research
0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.75
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Airtel Idea
mn minutes/2G BTS/mo
(5,000)
-
5,000
10,000
15,000
20,000
3QFY
15
4QFY
15
1QFY
16
2QFY
16
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17
4QFY
17
2G BTS added 3G+4G BTS added
Without deploying VoLTE, we believe that Idea can handle ~50% more traffic by sweating its existing 2G BTS’ and redeploying old 2G GSM sites.
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 12
Reduced capex = focus on strong markets Concerns on reduced capex guidance and ensuing loss of market share for Idea are unfounded. Idea and Vodafone are likely to complement each other, making focused broadband investments in their markets of strengths. Such an approach would cover 20 of India’s 22 circles, implying limited slippage for the merged entity. Moreover, the combined capex of Idea and Vodafone will remain higher than that of Airtel. Also, judging by the response of incumbents (many freebies have been withdrawn), we expect capex for data network capacity upgrades to be gradual and focused (top 10/30 markets). Reduced capex doesn’t translate into predictable FCF generation as the company faces sharply reduced operating cash flows due to revenue pressure.
Calibrated capex approach; Vodafone and Idea to focus on strong markets
Fears of market share loss due to sharp cut in Idea’s capex guidance, `60bn versus `78bn spent in FY17, are unfounded. In FY18, Idea’s data investments will focus on five of its eight leadership/runner-up circles including AP, Kerala, Maharashtra, MP, Kerala, Punjab and UP (W). Among its competitive circles, Idea could focus on two circles,; Bihar and HP. Vodafone could aggressively invest in its leadership and competitive circles that don’t overlap with Idea. These 13 circles include Assam, Delhi, Gujarat, Haryana, Karnataka, Kolkata, Mumbai, North East, Odisha, Rajasthan, TN, UP (E) and WB. The two companies are unlikely to aggressively invest in the remaining two circles.
Exhibit 25: Summary of Idea-Vodafone revenue market share and broadband spectrum capacity
4QFY17 AGR RMS AGR ( mn) 3G/4G Carriers
Idea Voda Idea+Voda Idea Voda Idea+Voda Idea Voda Idea+Voda Airtel* Jio
AP 28% 8% 36% 690 204 894 4 - 4 7 4
Assam 5% 24% 29% 26 140 166 3 4 7 7 5
Bihar 15% 14% 29% 249 246 495 4 - 4 7 5
Delhi 12% 30% 42% 200 494 694 1 5 6 7 4
Guj 27% 47% 74% 430 735 1,165 5 5 10 4 5
H.P. 12% 7% 19% 22 13 35 4 - 4 4 6
Hry 31% 32% 63% 152 156 308 5 5 10 4 4
J&K 8% 12% 19% 19 30 49 4 - 4 5 5
KTK 11% 14% 26% 266 332 598 1 2 3 6 4
KL 45% 24% 69% 693 371 1,063 6 5 11 4 4
Kol 9% 39% 47% 54 239 293 1 6 7 5 5
M.P. 53% 7% 60% 772 102 874 9 - 9 4 5
Mah 39% 27% 66% 1,068 726 1,795 7 5 12 5 4
Mum 9% 43% 51% 133 643 776 1 5 6 6 5
N.E. 3% 18% 22% 11 62 73 3 4 7 6 5
Ods 6% 18% 24% 36 111 148 3 3 6 5 5
Pun 32% 13% 46% 324 136 460 3 3 6 3 3
Raj 13% 25% 39% 193 362 555 4 4 8 4 5
TN 5% 27% 32% 136 727 863 1 3 4 5 4
U.P.(E) 15% 31% 46% 317 667 984 4 5 9 3 4
U.P.(W) 38% 24% 62% 499 313 812 5 4 9 3 3
W.B. 10% 43% 54% 110 451 560 3 5 8 4 5
Source: TRAI, Company, Ambit Capital research; * includes Telenor’s spectrum; Note: a 3G/4G (broadband carrier) is one chunk of contiguous 5MHz spectrum (FDD) or 10MHz spectrum (TDD). Click here for details of technology bands used by Indian telcos (check page 80)
Despite focusing only on strong/competitive markets in FY18, Idea and Vodafone will meaningfully investment in 20 of India’s 22 circles to setup broadband infrastructure.
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 13
Idea-Vodafone’s FY18E capex will exceed that of Airtel
Assuming flat YoY capex for Vodafone, we expect the combined non-spectrum capex of Idea-Vodafone to exceed that of Airtel. Despite Idea capex reduction, capex to sales for Idea-Vodafone is likely to remain at an elevated 19%, higher than FY11-17 average capex. As is the case in the past, Idea-Vodafone will continue following a strategy of ‘just in time’ 4G capex. Whilst Airtel aggressively invests in broadband capacity, Idea-Vodafone will focus on coverage, which we believe is an appropriate thought process in light of the imminent merger of the two companies. In any case, Idea-Vodafone has chosen the 2500MHz band (TDD-LTE, band 41) for capacity needs. Whilst the handset ecosystem is currently nascent compared to Airtel and Jio’s capacity band, viz. 2300MHz band (TDD-LTE, band 40), the same is evolving quickly due to the efforts of Chinese telcos. We believe that the handset ecosystem will ripen for Idea-Vodafone to deploy capacity spectrum in FY19.
Exhibit 26: Idea-Vodafone capex to exceed that of Airtel
Source: Company, Ambit Capital research; Note: we’ve considered metrics for Airtel’s India wireless business
Spectrum installments to result in negative FCF for Idea over FY18-20E
Prior to installment payments for past spectrum bids, Idea will be able to generate positive free cash flows (CFO minus capex) over FY18-20E. However, with large payments kicking in over FY19E (for bids in the FY15/16 auctions), Idea will make negative cumulative FCF over FY18-20E. Spectrum installments of `76.6bn and `73.6bn are payable to the Government over FY19E and FY20E. To Idea’s relief, the cash outgo for deferred payment liabilities is just `17.3bn in FY18E.
Exhibit 27: Idea will continue to make negative FCF over FY18E-FY20E
Source: Company, Ambit Capital research
0%
5%
10%
15%
20%
25%
-
50
100
150
200
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18EAirtel Idea-VodafoneAirtel capex/sales (%) - RHS Idea-Voda capex/sales (%) - RHS
` bn
(100)
(80)
(60)
(40)
(20)
-
20
40
60
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
FCF Spectrum capex
` bn
Idea’s FCF situation over FY18E-FY20E could improve if the Government decides to offer more lenient repayment terms for deferred spectrum liabilities.
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 14
Markets extrapolating telecom sector pain Whilst holding on to a negative long-term view for telcos (due to persistent ARPU challenges and high capital intensity), we call out the Street’s excessive pessimism on Idea. We expect robust 15% YoY revenue growth in 2HFY18 as Jio withdraws promotions. Focused cost initiatives such as eKYC enrollments, rationalization of unprofitable sites and renegotiation of vendor contracts lead us to build in stable EBITDA margin (27.7%) over FY18-19E. Premium valuation of 7.8x FY19E EV/EBITDA can re-rate as revenue growth improves and incumbents start gaining 2G subscribers owing to the exit of weak telcos. We continue to factor in 20% of management’s estimate of net synergy benefits (`670bn in FY20E) from the merger. We add NPV of discounted merger synergy value (`30/share) to of our DCF valuation arriving at a target price of `105.
Exhibit 28: Idea Cellular’s one-year forward EV/EBITDA band chart
Source: Bloomberg, Company, Ambit Capital research
Street has taken a gloomy view on Idea Idea’s execution has been stellar given its deep rural presence (industry highest 55% of rural subscribers; Dec’16) and strong brand. Idea has consistently followed a strategy of aggressively investing in leadership markets (7 circles accounting for 60% of 4QFY17 AGR); on its own also it has the best spectrum footprint in these markets. Street has extrapolated the 4QFY17 revenue weakness well into FY18. We differ as we incorporate trends from Apr’17, which clearly indicate that incumbents are clawing back. The market also seems to be ignoring Idea’s cost reduction initiatives, which led to 9% QoQ decline in fixed costs in 4QFY17. Key reasons for this are: (a) migration to low eKYC activation, saving `25-40 per gross subscriber added; (b) shutting down of unviable 2G sites; and (c) renegotiation of key vendor contracts. We factor in robust 15% YoY growth in 2HFY18 after building in 15% YoY decline in 1HFY18E.
Leverage isn’t as worrying given miniscule spectrum payout in FY18
We aren’t as concerned about Idea’s excessive leverage given the recovery in revenue (likely in 2HFY18) and miniscule spectrum payout (`17bn) in FY18. We expect Idea-Vodafone to divest tower assets (standalone towers and Indus stake) by 2018, resulting in a potential inflow of `180bn-200bn for the MergeCo. We continue to factor in a 20% holdco discount for Idea’s 11.15% stake in Indus Towers.
Best in industry spectrum footprint after merger with Vodafone
With 154 broadband carriers, Idea-Vodafone will have the best in industry spectrum footprint. Unlike past instances when telcos were bidding aggressively for the same band of spectrum, in the Oct’16 auctions Idea-Vodafone acquired 2500MHz capacity spectrum even as Airtel and Jio opted for 2300MHz. Whilst the 2300MHz spectrum enjoys a better device ecosystem, we expect rapid evolution of device ecosystem in the 2500MHz band also given investments made by Chinese telcos.
4
6
8
10
12
14
16
Nov-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jun-14 Mar-15 Dec-15 Sep-16 Jun-17
5-yr avg EV/EBITDASharp de-rating as new telcos get licenses
7 licenses cancelled by the Supreme Court
Win's back licenses in Nov'12 auctions Raises `37.5bn
equity
Manages to renew spectrum in key markets
Jio's launch Tata launches per second billing
Improving FCF generation as capex moderated
Merger talks with Vodafone
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 15
Exhibit 29: After merger, Idea has the highest number of broadband carriers in the industry
Source: Company, Ambit Capital research; * including Telenor’s spectrum; Note: a broadband carrier is one chunk of contiguous 5MHz spectrum (FDD) or 10MHz spectrum (TDD). Click here for details of technology bands used by Indian telcos (check page 80)
More pessimism baked into Idea than Bharti
Consensus’ bearish outlook on Idea vis-à-vis Bharti is reflected in Idea’s 28%/43% FY18E EBITDA downgrades over 6 months and 12 months compared to 11%/24% for Airtel. Airtel’s Africa outperformance doesn’t appear to explain this significant difference in the Street’s views. The market appears skeptical of Idea’s recent cost-cutting initiatives whilst subscribing to Airtel’s consistent commentary (and execution) of its ‘war on waste’ programme resulting in stable fixed cost. We expect upgrades in Idea as the Street starts factoring in revenue recovery in 2HFY18.
Exhibit 30: Bharti witnessed EBITDA downgrades…
Source: Bloomberg, Ambit Capital research
Exhibit 31: …but Street pessimism for Idea is much higher
Source: Bloomberg, Ambit Capital research
Idea trades at a premium to Chinese, Thai and Indonesian telcos owing to potential synergy benefits from merger with Vodafone. Market leaders in Singapore and Malaysia trade at a hefty premium to Idea owing to their superior return ratios.
Exhibit 32: 1-year forward PB chart – Limited downside
Source: Bloomberg, Ambit Capital research
Exhibit 33: 1-year forward P/Sales chart
Source: Bloomberg, Ambit Capital research
-
5
10
15
AP
Ass
am
Biha
r
Del
hi
Guj
H.P
.
Hry
J&K
KTK K
L
Kol
M.P
.
Mah
Mum
N.E
.
Ods
Pun
Raj
TN
U.P
.(E)
U.P
.(W)
W.B
.
Idea+Voda Airtel* Jio
-20%
-15%
-10%
-5%
0%FY18E FY19E
3month 6month 12month
-50%
-40%
-30%
-20%
-10%
0%FY18E FY19E
3month 6month 12month
- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0
Nov
-07
Jun-
08
Jan-
09
Aug
-09
Mar
-10
Oct
-10
May
-11
Dec
-11
Jul-
12
Feb-
13
Sep-
13
Apr
-14
Nov
-14
Jun-
15
Jan-
16
Aug
-16
Mar
-17
Idea 1-yr fwd P/B Avg P/B
0.0
1.0
2.0
3.0
4.0
5.0
Nov
-07
Jul-
08
Apr
-09
Jan-
10
Oct
-10
Jul-
11
Apr
-12
Jan-
13
Oct
-13
Jun-
14
Mar
-15
Dec
-15
Sep-
16
Jun-
17
Idea 1-yr fwd P/S Avg EV/Sales
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 16
Exhibit 34: Telecom – Global comparatives
Company Country M-Cap (US$ mn)
P/E ROE (%) EV/EBITDA (x) FY17-19 CAGR (%)
FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Sales EBITDA EPS
Bharti Airtel India 22,653 48.0 31.0 20.4 4.9 6.5 9.0 7.6 6.8 6.1 9.3 11.4 53.4
Idea Cellular India 4,478 (12.2) (15.2) (19.9) (9.2) (9.3) (6.3) 8.8 7.8 7.2 5.0 10.5 (21.7)
Average 17.9 7.9 0.2 (2.1) (1.4) 1.4 8.2 7.3 6.7 7.1 11.0 15.8
China Tel China 39,118 16.9 15.2 13.7 5.8 6.2 6.6 3.7 3.5 3.3 4.9 5.2 11.2
China Unicom China 35,307 440.6 54.0 27.9 0.3 2.2 3.9 4.9 4.6 4.3 3.8 6.5 297.4
China Mobile China 219,589 15.8 14.8 13.8 11.5 11.5 11.6 4.1 3.9 3.7 4.6 5.3 6.7
XL Axiata Indonesia 2,736 97.1 112.1 42.6 1.4 1.3 3.8 6.6 6.0 5.5 7.4 10.4 50.9
PT Telkom Indonesia 34,198 23.5 19.4 17.2 25.1 24.4 25.2 8.1 7.1 6.5 10.4 12.0 17.1
AIS Thailand 15,655 17.4 18.1 16.9 81.1 63.3 58.3 10.1 9.1 8.4 3.8 9.8 1.2
TAC Thailand 3,604 58.7 98.5 116.4 3.9 3.3 5.8 5.6 5.5 5.6 0.9 0.2 (28.9)
True Corp Thailand 6,037 (72.9) (111.4) 247.3 (5.7) (1.5) 0.5 10.6 9.4 8.1 8.2 14.4 Axiata Group Malaysia 10,315 87.9 31.2 26.8 1.5 5.7 6.5 7.8 7.3 6.9 6.0 6.2 81.3
Digi Malaysia 9,027 23.8 23.9 23.7 304.1 302.1 301.7 13.8 13.9 13.7 0.8 0.4 0.1
Maxis Behrad Malaysia 9,768 20.9 21.9 21.9 43.7 37.9 34.6 11.2 11.4 11.4 0.6 (1.0) (2.5)
Telekom Malaysia 5,771 32.0 29.2 27.6 9.1 11.0 11.4 7.8 7.8 7.4 4.0 2.8 7.6
Globe Malaysia 5,524 17.5 18.7 18.0 24.3 23.7 23.6 7.5 7.3 7.0 4.6 3.8 (1.2)
PLDT Malaysia 7,778 19.6 17.8 17.7 17.4 27.5 25.4 9.1 7.9 7.6 2.0 9.6 5.1
SKT Korea 18,596 12.7 9.6 9.9 10.9 13.0 11.6 5.6 5.5 5.4 1.7 2.5 12.9
KT Korea 14,066 13.0 14.1 13.4 18.3 15.7 15.1 8.5 8.3 8.0 4.3 3.0 (1.2)
LGU Korea 6,500 15.1 13.6 12.2 11.2 10.8 11.2 4.6 4.3 4.2 3.1 4.2 11.1
PCCW Hong Kong 4,394 16.7 15.0 15.2 17.8 19.1 15.6 6.3 6.0 5.7 3.3 5.2 4.9
HTHKH Hong Kong 1,736 19.3 18.9 17.9 6.1 6.2 6.5 7.4 7.2 7.1 3.3 2.5 3.8
Smartone Hong Kong 1,460 14.3 15.1 14.8 18.7 17.5 17.3 5.0 5.3 5.4 (15.4) (4.1) (1.8)
M1 Singapore 1,478 13.7 14.7 16.5 32.8 34.0 29.0 7.8 7.9 8.2 (2.5) (2.5) (8.6)
StarHub Singapore 3,357 13.7 17.2 18.0 119.0 142.0 144.6 7.6 8.4 8.5 (0.7) (5.5) (12.9)
SingTel Singapore 44,273 16.0 15.3 14.5 14.5 14.3 14.4 14.4 14.1 13.9 2.3 2.0 5.1
Average 40.6 21.6 33.2 33.6 34.4 34.1 7.7 7.5 7.2 2.7 4.0 20.9
Median 17.4 17.8 17.7 14.5 14.3 14.4 7.6 7.3 7.0 3.3 3.8 5.0
Source: Bloomberg, Ambit Capital research
More pessimism baked into Idea than Bharti
Consensus’ bearish outlook on Idea vis-à-vis Bharti is reflected in Idea’s 28%/43% FY18E EBITDA downgrades over 6 months and 12 months compared to 11%/24% for Airtel. Airtel’s Africa outperformance doesn’t appear to explain this significant difference in the Street’s views. The market appears skeptical of Idea’s recent cost-cutting initiatives whilst subscribing to Airtel’s consistent commentary (and execution) of its ‘war on waste’ programme resulting in stable fixed cost. We expect upgrades in Idea as the Street starts factoring in revenue recovery in 2HFY18.
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 17
Exhibit 35: Key assumptions ` bn, unless mentioned FY17 FY18E FY19E FY20E Comments
Operating metrics Subscribers (mn) 189.5 209.5 239.5 251.5 We expect strong subscriber-led growth in FY18E/FY19E due to the
potential exit of weak telcos (Aircel, Rcom and Tata Tele) Growth (%) 8.2 10.6 14.3 5.0
ARPU ( ) 161 147 146 151 We expect weak ARPU trends to persist over FY18E-FY20E as we remain unenthusiastic about consumer behaviour. Also, given the subscriber addition from weak operators, we expect ARPU growth to remain weak.
Growth (%) (9.5) (9.1) (0.2) 3.4 Average minutes of usage/customer/month (MOU) 382 409 429 447 Average MOU will increase sharply led by SIM consolidation and launch of
unlimited voice offers. Average voice realisation per voice minute (`) 0.31 0.26 0.23 0.21
Total minutes of use (bn) 836 979 1,157 1,315 We expect surge in total minutes of use due to high average MOU and rapid subscriber addition
Data penetration (%) 22.3 25.9 30.2 36.7 Data ARPU (`) 138 126 134 139 Data ARPU to recover from FY18 lows as Jio reduces freebies.
Data usage (MB/customer/month) 843 1,096 1,370 1,672 We expect 27% CAGR of per subscriber data usage led by increased adoption of mobile broadband
Total data volume (mn GB) 426 620 1,015 1,611 Average revenue/MB of data ( ) 0.16 0.11 0.10 0.08 Monthly subscriber churn (%) 5.6 6.5 6.5 6.0 Subscriber churn to moderate after rising in FY18E due to competition
Capex parameters Non-spectrum capex 78.5 62.4 77.8 75.0 We assume increased non-spectrum capex, in line with rising data
demand Spectrum capex 73.4 17.3 76.6 73.6 Capex to CFO (%) 144 79 118 99 Financial metrics Revenue 355.8 354.0 397.2 448.9 After revenue decline over FY17/FY18E, we expect sharp recovery in Idea's
revenue led by subscriber addition. Growth (%) (1.0) (0.5) 12.2 13.0 EBITDA 102.8 98.1 109.5 133.9 Robust EBITDA growth is led by operating leverage.
Growth (%) (14.1) (4.6) 11.7 22.3 EBITDA margin (%) 28.9 27.7 27.6 29.8 EBITDA margins will stabilise over FY18-19 as Idea expands it broadband
network. PAT (4.0) (17.8) (9.6) 3.5 EPS (`) (1.1) (4.9) (2.7) 1.0 Despite EBITDA growth, losses will persist in FY19 due to high interest and
depreciation. Net debt 500.7 516.6 564.8 531.7 FCF (46.5) 20.7 (23.3) 1.8 FCF generation will be patchy due to lumpy spectrum liability payments
Source: Company, Ambit Capital research
Exhibit 36: Ambit versus consensus
mn Ambit Consensus Deviation Comments
Revenue FY18E 353,997 348,728 1.5 We expect consolidation to hasten. Incumbents'
revenue growth will recover in 2HFY18 FY19E 397,227 370,959 7.1 FY20E 448,905 384,468 16.8 We build in sharp revenue recovery for Idea on the
back of subscriber gains from the exit of weak telcos EBITDA FY18E 98,055 89,395 9.7 Consensus seems to have taken a very bearish view on
EBITDA; underestimating cost savings potential FY19E 109,544 101,710 7.7 FY20E 133,943 109,276 22.6 Our EBITDA estimates reflect higher revenue
assumptions and ensuing operating leverage PAT FY18E (17,769) (23,546) NM Divergent PAT vis-à-vis consensus estimates are on
account of our higher EBITDA assumptions
FY19E (9,561) (18,667) NM
FY20E 3,471 (14,623) NM
Source: Bloomberg, Ambit Capital research
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 18
Key catalysts and risks Key catalysts 15% YoY revenue growth in 2HFY18 owing to reduce discounts from Jio:
Jio’s behaviour remains the most crucial factor for telecom sector revenue growth. Given regulatory pressures and imperative to gain revenue market share, we expect Jio to withdraw promotions in 2HFY18. We factor in 15% YoY 2HFY18 revenue growth from a low base for Idea.
Calibrated withdrawal of weak operators from several circles resulting 14% subscriber growth over FY19E: weak telcos such as Aircel, Reliance Communications, Tata Teleservices and Telenor continue to have >200mn active subscribers. Whilst some of these customers are multi-SIM users, we believe that there are price sensitive primary SIM users also. These customers will migrate to incumbents and Jio in their markets of dominance. We factor in 14% YoY subscriber growth for Idea on the back of weak telco exits.
Key risks Continued freebies by Jio: If Jio refuses to reduce freebies then telecom sector
revenue growth could remain under pressure. Jio’s lobbying could prevent potential regulatory intervention against its predatory pricing.
Equity infusion in weak telcos: Equity infusion into weak telcos would delay industry consolidation that we are currently factoring over FY19.
Exhibit 37: Explanation for our forensic accounting scores
Segment Score Comments
Accounting GREEN Idea is in Ambit 'Hawk's' 'Zone of Greatness,' both within the sector as well as the BSE 500 on account of its top quartile performance on the following counts: (1) high pre-tax CFO/EBITDA; (2) minimal variability in depreciation rate; (3) low unprovided receivables outstanding for over six months
Predictability RED Due to competitive pressures (RJio's recent market entry), the pricing environment is uncertain, resulting in low earnings predictability.
Earnings momentum RED Consensus has downgraded Idea's earnings by >10% over the last month.
Source: Ambit Capital research
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 19
Forensic score percentile
Source: Ambit HAWK, Ambit Capital research
Greatness score percentile
Source: Ambit HAWK, Ambit Capital research
Idea is in the Zone of ‘Safety’ owing to robust CFO/EBITDA and low contingent liabilities
Source: Ambit HAWK, Ambit Capital research
Idea is in the Zone of ‘Greatness’ due to consistent sales/operating profit growth
Source: Ambit HAWK, Ambit Capital research
Click here to access our ‘HAWK’ platform.
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 20
P&L and key valuation metrics (` bn)
Consol, Year to March ( bn) FY16 FY17E FY18E FY19E FY20E
Revenue 359 356 354 397 449
EBITDA 120 103 98 110 134
EBIT 57 24 17 25 47
PAT 23 (4) (18) (10) 3
Profit and loss ratios
EBITDA margin (%) 33.3 28.9 27.7 27.6 29.8
EBIT margin (%) 15.9 6.9 4.7 6.2 10.4
Net profit margin (%) 6.4 (1.1) (5.0) (2.4) 0.8
Valuation metrics
EV/EBITDA (x) 5.6 7.7 8.2 7.8 6.1
EV/Sales (x) 1.9 2.2 2.3 2.1 1.8
P/E (x) 12.6 (71.4) (16.2) (30.2) 83.1
P/B (x) 1.2 1.2 1.3 1.3 1.3
FCF yield (%) (6.9) (7.4) 7.2 (8.1) 0.6
Source: Company, Ambit Capital research
Balance sheet and key return ratios (` bn)
Year to March ( bn) FY16 FY17 FY18E FY19E FY20E
Total Assets 692 830 867 878 781
Fixed Assets (incl. CWIP) 272 304 311 333 351
Intangible assets 440 539 513 544 514
Investments & other assets 44 47 48 49 50
Net current assets (65) (60) (4) (48) (133)
Total liabilities 692 830 867 878 781
Debt 117 193 229 228 163
Deferred payment obligations 311 367 386 407 372
Other liabilities 0 0 0 0 0
Total networth 236 247 230 220 223
Balance sheet metrics
RoCE (%) 6.2 1.5 1.3 1.7 3.7
RoE (%) 12.2 (1.7) (7.5) (4.3) 1.6
Net debt/equity (x) 1.6 2.0 2.3 2.6 2.4
Net debt/EBITDA (x) 3.2 4.9 5.3 5.2 4.0
Source: Company, Ambit Capital research
Balance sheet and key return ratios (` bn) Year to March ( bn) FY16 FY17 FY18E FY19E FY20E
CFO 109 105 100 131 150
Tangible assets capex (71) (53) (62) (78) (75)
Intangible assets capex (58) (73) (17) (77) (74)
CFI (24) (156) (75) (149) (143)
Net borrowings (86) 84 72 37 (26)
Interest paid (19) (37) (49) (47) (48)
CFF (93) 44 23 (11) (74)
FCF (20) (21) 21 (23) 2
Source: Company, Ambit Capital research
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 21
Institutional Equities Team Saurabh Mukherjea, CFA CEO, Ambit Capital Private Limited (022) 30433174 [email protected] Pramod Gubbi, CFA Head of Equities (022) 30433124 [email protected]
Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Home Building (022) 30433241 [email protected] Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 [email protected] Abhishek Ranganathan, CFA Retail / Consumer Discretionary (022) 30433085 [email protected] Anuj Bansal Consumer (022) 30433122 [email protected] Aditi Singh Economy / Strategy (022) 30433284 [email protected] Ashvin Shetty, CFA Automobiles / Auto Ancillaries (022) 30433285 [email protected] Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 [email protected] Deepesh Agarwal, CFA Power Utilities / Capital Goods (022) 30433275 [email protected] Dhiraj Mistry, CFA Consumer (022) 30433264 [email protected] Gaurav Khandelwal, CFA Automobiles / Auto Ancillaries (022) 30433132 [email protected] Girisha Saraf Home Building (022) 30433211 [email protected] Karan Khanna, CFA Strategy (022) 30433251 [email protected] Mayank Porwal Retail / Consumer Discretionary (022) 30433214 [email protected] Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected] Paresh Dave, CFA Healthcare (022) 30433212 [email protected] Parita Ashar, CFA Cement / Metals / Aviation (022) 30433223 [email protected] Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 [email protected] Rahil Shah Banking / Financial Services (022) 30433217 [email protected] Ravi Singh Banking / Financial Services (022) 30433181 [email protected] Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 [email protected] Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected] Sagar Rastogi Technology (022) 30433291 [email protected] Sudheer Guntupalli Technology (022) 30433203 [email protected] Sumit Shekhar Economy / Strategy (022) 30433229 [email protected] Utsav Mehta, CFA E&C / Infrastructure (022) 30433209 [email protected] Vivekanand Subbaraman, CFA Media / Telecom (022) 30433261 [email protected]
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7886 2740 [email protected] Dharmen Shah India / Asia (022) 30433289 [email protected] Dipti Mehta India (022) 30433053 [email protected] Krishnan V India / Asia (022) 30433295 [email protected] Nityam Shah, CFA Europe (022) 30433259 [email protected] Punitraj Mehra, CFA India / Asia (022) 30433198 [email protected] Shaleen Silori India (022) 30433256 [email protected]
Singapore
Praveena Pattabiraman Singapore +65 6536 0481 [email protected] Shashank Abhisheik Singapore +65 6536 1935 [email protected]
USA / Canada
Ravilochan Pola – CEO Americas +1(646) 793 6001 [email protected] Hitakshi Mehra Americas +1(646) 793 6002 [email protected] Achint Bhagat, CFA Americas +1(646) 793 6752 [email protected]
Production
Sajid Merchant Production (022) 30433247 [email protected] Sharoz G Hussain Production (022) 30433183 [email protected] Jestin George Editor (022) 30433272 [email protected] Richard Mugutmal Editor (022) 30433273 [email protected] Nikhil Pillai Database (022) 30433265 [email protected]
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 22
Idea Cellular Ltd (IDEA IN, BUY)
Source: Bloomberg, Ambit Capital research
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Idea Cellular Ltd
Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 23
Explanation of Investment Rating
Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
* In case the recommendation given by the Research Analyst becomes inconsistent with the rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures (like change in stance/estimates) to make the recommendation consistent with the rating legend.
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Idea Cellular
June 23, 2017 Ambit Capital Pvt. Ltd. Page 24
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