What's the possible future of Vodafone Idea Ltd's share price?

Idea Cellular Ltd, which was the third largest mobile operator in India until August'2018, was seeing it's Revenues fall and Profits disappear after the onslaught of #RelianceJio. The same was the case with all other mobile operators, including Bharti Airtel and Vodafone India. #BhartiAirtel made some clever purchases during the distress in the sector and became self-sufficient in terms of All-India spectrum for 4G services. Vodafone India and #IdeaCellular were not that swift in decision making and were left with no choice but to merge their operations in order to become stronger and survive the #Reliance #Jio Tsunami.

After nearly 18 months of starting the procedure, the unlisted #VodafoneIndia merged into the listed #IdeaCellular to form Vodafone Idea Ltd. on 31st August 2018. This merger is expected to give them several benefits. On one hand, they will be able to combine their Spectrum Holdings and offer much larger traffic-handling capacity to their combined customer base. This will also allow them to roll-out 4G services across India at a much faster pace and also re-farm some of their precious 2G/3G spectrum for 4G, which is the revenue driver for all mobile operators currently. 2G & 3G are both dying technologies and hence it will be a waste to keep some of the valuable spectrum occupied for offering 2G/3G services for long.

Apart from the Spectrum and Network combining part, there are huge benefits to be had by merging their IT & Billing systems, Sales & Marketing teams and even their Administrative teams. There will be huge Operating Cost savings in the Tower tenancies. Previously both #VodafoneIndia and #IdeaCellular were two different tenants on the same towers or same areas. Now with their Networks getting combined over a period of time, these duplication of tenancies will be avoided and the merged entity will be able to save hundreds of crores every quarter in just the rental payments to tower companies. There will be some penalties to be paid to the tower companies in the initial few quarters for cancellation of rental agreements prematurely, but this will translate into substantial savings in the coming years.

Now lets look at the way the share price has behaved over the last 1 year:

In May'2018, when it was just Idea Cellular Ltd., the share price was hovering a little over Rs.60 mark. But by the time the merger actually became effective on 31st August 2018, the share price had dropped below the Rs.50 mark. It dropped further as the #Q2FY19 results were announced (which included numbers for Idea Cellular Ltd for first 2 months and Vodafone Idea Ltd for the month of September 2018). Since then the share price hovered between the Rs.30 to 40 range till March 2019.

In March 2019, #VodafoneIdea announced a Rights Issue to raise fresh capital of Rs.25,000 crores. Everyone was expecting the company to offer the Rights Issue to be at a price of around Rs.23 to 25 per share, which was at a discount of about 20 to 30% to the then share price. But Vodafone Idea Ltd. shocked everyone by pricing the Rights Issue at just Rs.12.50 per share. What this meant is that there will be much higher level of dilution to the company's Equity base as it will be issuing nearly 2000 crore fresh shares to raise Rs.25,000 crores in fresh capital.

Before the announcement of Rights Issue, the Market Cap of Vodafone Idea Ltd stood at around Rs.26,200 crores, when the share price was around Rs.30/-. Today the share price is trading at just over Rs.13/-. With the expanded Equity base, the Market Cap of the company now stands at about Rs.37,500 crores, which is an increase of just over Rs.11,000 crores. Remember that the company has raised Rs.25,000 crores in fresh capital via the Rights Issue. Hence ideally, the company's Market Cap should have increased by approximately that much value. The Rights Issue adjusted price, from the pre-Rights Issue price of Rs.30, should have been around Rs.17.50 to 18 per share. That means the price has seen further correction of another 25%.

Now lets look at the company's Quarterly Financial Performance. As we can see from the Quarterly Total Income chart alongside, #IdeaCellular Ltd. saw it's Revenues slide from levels of about Rs.9500 crores in March 2016 to about Rs.6000 crores by June 2018. That means in a matter of about 2 years, the company had seen it's revenues drop by over 35%. In the September 2018 quarter, #VodafoneIndia 's revenues were added to Idea Cellular's for the last one month only. Hence the combined Vodafone Idea Ltd's revenues saw a small jump to about Rs.7900 crores. From December 2018 quarter, we can see the full numbers for the combined entity, which is currently stable at just under Rs.12000 crores. With most of the intense competition period behind us, things are expected to get better for all the leading telecom companies now, since the Top-3 players hold over 90% market share and No formidable player expected to enter the market now.

With every passing week, #VodafoneIdea is rapidly working to increase it's 4G network footprint and launch integrated network, instead of having 2 different operating networks for #Vodafone & #Idea brands. By the end of 2019, #VodafoneIdea is expected to complete more than 75% of the Network Integration work. Network Integration is expected to translate into better quality of service to all it's customers. Hence as the Network Integration coverage increases progressively, the exodus of customers from Vodafone & Idea to either Jio or Airtel, will stop and the company could start seeing inflow of new customers. Plus there will be increase in the number of it's own customers upgrading from 2G or 3G use to availing 4G service. This should help in bringing back some amount of Revenue growth for Vodafone Idea Ltd in the coming quarters.

In the chart alongside, we can see the Quarterly progress of Idea Cellular's ( and then Vodafone Idea's) EBITDA since March 2016. Idea Cellular was managing at EBITDA of over Rs.3600 crores (EBITDA margin of over 36%) on it's own back in March 2016. It saw a dramatic collapse to just Rs.800 crores by June 2018. Over the last 2 quarters, the savings from Operational synergies of #VodafoneIdea have started showing it's signs as the EBITDA has already increased to over Rs.1900 crores in March 2019. The EBITDA Margin stood at just over 16% for March 2019 quarter. I am expecting this to improve to about 25% by December 2019 or March 2020. That means the EBITDA figure is expected to improve further to about Rs.3000 crores by then. At that point the company will be generating some amount of Cash Profit. The Interest outgo for #VodafoneIdea stood at Rs.2946 crores in #Q4FY19. With fresh Capital infusion of Rs.25,000 crores during the current quarter, combined with ongoing CAPEX, we can expect the quarterly Interest outgo to remain in the Rs.2400 to 2800 crores range for the next few quarters.

Conclusion:

For FY20, I am expecting #VodafoneIdea to report a Total Income of little over Rs.50,000 crores and an EBITDA of around Rs.11,000 crores, with a Cash Profit of about Rs.1000 to 1500 crores. Yes, the company will continue to post Net Loss as the Depreciation figure will continue to increase and could be around Rs.20,000 crores for the year. By the end of FY20, we could see slight reduction in Competitive Pressures due to the following reasons: Firstly, India's telecom market has now become a 3-player market with no major competitor expected to enter now. The most aggressive player, Reliance Jio, is expected to curtail it's aggression as it is close to achieving it's target of 400 million subscribers. And #Reliance #Jio itself is facing Network congestion in several parts of the country. Hence we can expect Reliance Jio to finally start hiking prices of all it's Unlimited Plans, anytime in the next 6 months. As and when this happens, it will be a very big positive for all the operators. Even if #RelianceJio increases the prices of it's plans by 5%, we could see the valuations of all the listed telecom players to increase by upto 20% quite easily.

In short, I think the worst is behind us in case of financial health of telecom operators is concerned. More so in the case of Vodafone Idea Ltd., which saw it's share price recently take a dip below the Rights Issue price of Rs.12.50/-. I am fairly confident that Vodafone Idea Ltd. will survive the current intense Competitive pressures and then start gaining strength by the end of FY20. From the current No.1 Rank, Vodafone Idea could drop a place sometime this year as it is losing market share in subscribers as well as Revenues, but it will still continue to be a formidable player in the Indian telecom market and might even start gaining market share by the end of FY20.

Are things really so bad with Yes Bank?

Until less than a year ago, Yes Bank was touted to be amongst the best Private Sector Banks in India. Over the years, Yes Bank has earned a name to be a high-tech Bank, one which makes good use of technology to innovate with products & services. Yes Bank was probably the first Bank to bring 2-step authentication for Internet Banking facility, at a time when many other banks weren't even offering decent Internet Banking facility. Yes Bank is still the leader in many new generation transaction services like UPI or IMPS or Aadhar-enabled Payment System or API Banking, where it is the Banking partner for many Fintech companies like PhonePe, etc.

Over the last 10-15 years, Yes Bank has built a decent reputation to be amongst the best when it came to Corporate Banking, with lots of innovative products & knowledge-based services. At the same time, it was spreading it's Branch Network to reach a scale of over 1100 branches currently. With a decent number of Branches, spread across most of the important cities in India, Yes Bank has now started focusing on increasing it's Retail & SME Banking business. With a strong 62% Y-o-Y Growth in Retail Loan book, it now constitutes 16.7% of the Total Loan Book, which was just 12.2% a year ago. Even the Retail Term Deposits have grown over 40% Y-o-Y. This momentum is expected to continue in this year & the next, as the Bank wants to widen it's customer reach & reduce dependence on Corporate Banking.

A few days ago, when Yes Bank reported it's first Quarterly Net Loss for Q4FY19, on the back of a large provisioning related to IL&FS exposure, the share price of Yes Bank has been battered like as if the Bank is about to shut down in the near future. Just have a look at the share price movement of Yes Bank over the last 1 year or so:

Yes Bank was trading at near Rs.400 level in August'2018. A few weeks after that, the news of RBI's rejection to extension of Mr. Rana Kapoor's term as MD & CEO came in and the share price got hammered to about Rs.160-170 levels. After stabilising for a few months, it was regaining strength after the appointment of an experienced Banker, Mr. Ravneet Gill as the new MD & CEO of Yes Bank. But the share price is again behaving as if all hell has broken loose on Yes Bank with just one large Provisioning. Somehow I feel that all the Business Channels are working in tandem to write-off Yes Bank's survival chances. I certainly feel that things are certainly not as bad with Yes Bank as they are being made out to be by most of the Business channels as pink newspapers.

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At today's closing price, Yes Bank's Market Cap is just under Rs.32,000 crores. I feel this is nothing short of Crazy. Look at all the PSU Banks. They have much much larger NPA problems, have been writing off loans since the last few years and are still sitting on large Net NPA figures. Even those Banks are trading at better valuations than Yes Bank. Take the case of State Bank of India, India's largest Bank. It has a Loan Book of almost Rs.22 lakh crores, nearly 9 times the size of Yes Bank Loan Book. But it's sitting on Gross NPA of over Rs.1.72 lakh crores, which is nearly 22 times that of Yes Bank's figure. Despite years of large Provisionings, SBI's Net NPA figure still stands at almost Rs.66,000 crores, which is nearly 15 times that of Yes Bank's figure. Still State Bank of India has a Market Cap of over Rs.2.80 lakh crores, which is nearly 9 times that of Yes Bank's figure.

In the adjoining table, I have compared Yes Bank's FY'19 figures with that of Bank of India's FY'19 figures. Bank of India is much much smaller than State Bank of India and hence is within comparable range of Yes Bank.

Bank of India's Loan Book is nearly 57% larger than Yes Bank's Loan Book. Still it's Interest Income & Net Interest Income are just about 40% higher. Clearly indicates Yes Bank's superior yields. On the other hand, BoI's Operating Expenses are 71% higher than Yes Bank's. Which again shows the PSU Bank's Operating inefficiencies when compared to a modern Private Sector Bank. BoI's Provisions are nearly 3 times that of Yes Bank's, which pulled the former into a substantial Net Loss. Thanks to Losses since the last few years, BoI has not been declaring any Dividends since the year 2015. Whereas Yes Bank continues to pay Dividend.

BoI's Gross NPA is nearly 7.7 times that of Yes Bank's figure, while it's Net NPA is still 4.2 times Yes Bank's figure. Despite all these negatives, Bank of India's Market Cap is just about 29% lower than that of Yes Bank's figure. In a couple of years time, Yes Bank will be close to overtaking Bank of India in terms of Total Income, thanks to it's faster growth rates. The management has projected a growth rate of between 15 to 20% for FY'20 and I think it can easily achieve this figure.

The point that I wish to make is that: All the recent negative environment surrounding Yes Bank, created by all the Business Channels & Business dailies, are short term in nature. Their effect with go away after a few weeks. Appointment of a Board member by RBI on Yes Bank's board shouldn't be taken as such a big negative. I think RBI itself has undergone management change recently and the new Governor wants to play it safe. Having their nominee on Yes Bank's board will help the Bank to regain it's reputation sooner rather than later. I think this is an excellent opportunity for Long Term Investors to get into Yes Bank. I still have faith in Yes Bank and believe that it has what it takes to be the next HDFC Bank or something on those lines. Just give it some time.

Do Share your thoughts on this report or Views on the points discussed. Awaiting your Comments.

IRB Infra. Developers Ltd.: Reality Check - Financial Performance vs Share Price performance.

I have been following IRB Infra. Developers Ltd. for quite a long time. I think that the Road construction business has a very good future as India, being a developing nation, needs to build substantial transport infrastructure for many more years. But what I haven't understood is the valuation that stock market gives to different players in the same industry.

While the P/E Ratio of most companies in the Infrastructure sector is healthy at about 20 or more, companies like IRB Infra. are trading at P/E Ratio of just about 5 currently. Hence I thought it fit to present the companies Financial Performance over the recent 3 years and compare it with the company's share price movement over the last 5-6 quarters.

Have a look at the accompanying chart showing the Trailing-Twelve-Months progress of IRB Infra's Total Income and EBITDA. From a level of Rs.4700 crores in December'2015, IRB's Total Income has grown to above Rs.6300 crores in December'2018. Remember that this growth is despite the fact that IRB sold about 7 or 8 Toll Projects to IRB InvIT, which is an Infrastructure Investment Trust, sometime in the middle of year 2017. Those projects are generating about Rs.1200 crores of Revenues annually. Hence, effectively IRB Infra's Total Income currently would have reached a level of about Rs.7500 crores. With commissioning of newer projects, IRB Infra has managed to bring it's T-T-M Total Income back to levels it was at before the sale of few projects to the InvIT. With more projects in the pipeline, expected to be commissioned over the next 2 years, we can expect the company's Total Income to continue it's steady climb at

about 10% Y-o-Y or higher. IRB's EBITDA recovery has slightly lagged behind over the recent 2 quarters, but it's margin is healthy at about 48%. Hopefully it will get back to it's normal level of about 50%.

During the period of last 3 years, IRB's EPS has improved from about Rs.18 in December'2015 to just over Rs.25 in December'2018, again on the T-T-M basis. And this is despite the fact that a few Toll projects were sold to the InvIT.

There is very good reason why IRB sold a few Toll projects to the InvIT. Even though it lost about 20% of it's Revenues and a slightly higher percentage of it's Net Profit due to the sale of those projects, it also helped bring down the Debt burden on the company's books as all the project-related Debt for those projects got transferred to the InvIT. IRB will continue to be the Project manager for all those projects and will receive a small fee for the same. Apart from that, the lowered Debt burden allows the company to again bid for more projects and increase it's pipeline for future years. And I think InvITs get some Tax concessions too.

Now let's look at IRB's share price movement over the recent quarters.

As we can see that, after hitting a high of about Rs.280 in April'2018, IRB's share price gradually slid down to levels of about Rs.120 by October'2018. There could be 2 possible reasons for this: (1) The News that the contract for one of IRB's most prestigious projects, the Mumbai-Pune Expressway, was coming to an end in August'2019 and MSRDC (Maharashtra State Road Development Corporation) decided to call for fresh tenders; (2) around the same time the News of IL&FS Loan default & scam broke out. IL&FS as a group, had considerable presence in Financing of Infrastructure projects. Hence a Default on it's part is bound to create some nervousness for other Financiers while lending to newer Infrastructure Projects.

Later when it was seen that the default was not due to poor repayment record of some infra project, but because of a well orchestrated scam by top management of IL&FS, the nervousness might have reduced by a considerable extent. Companies like IRB which have a strong Balancesheet and a good repayment track record, should not find it too difficult to raise resources while bidding for newer projects. IRB's share price has spent the last 6 months in creating a strong base in the Rs.120 to 160 range. Hopefully it is getting ready to break-out of this range on the higher side in the coming months. In terms of valuations too, at the current price of about Rs.122, IRB's share trades at just under 5 times it's EPS, which is a pitiable valuation from any angle. Even it's consistent Dividend paying record, which currently translates into a Dividend Yield of 4+%, should help it earn much better valuations. I think IRB deserves a P/E Ratio of atleast 15 or more, but even for a P/E Ratio of 10, the share price should double from current levels.

Happy Investing!!!