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.
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%.
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.
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.
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