Moneycontrol
Mar 20, 2017 02:47 PM IST | Source: Moneycontrol.com

Idea Cellular soars over 50% since Jan; analysts still advise caution post merger

Telecom sector has undergone change over the years especially after the entrance of Reliance Jio. While on one hand, the sector witnessed consolidation in terms of players, on the other hand, competitive intensity has been equally high, suggest experts.

ByKshitij Anand
Idea Cellular soars over 50% since Jan; analysts still advise caution post merger

Kshitij Anand,

Moneycontrol News

The first time when the D-Street got the whiff of a merger between the Idea Cellular and Vodafone India was back in the month of January when CLSA released a consolidated report on 17th.

Although the news was doing the rounds before as well, but the share of Idea Cellular picked up momentum from that day itself and rallied over 50 per cent since then. Shares of Idea Cellular rose from Rs 69.2 on 17th January to Rs 107.90 on 17 March, which translates into an upside of 55 per cent.

Bringing an end to speculation, Idea Cellular board on Monday approved the merger between the Vodafone India and its subsidiary Vodafone Mobile Services with itself, in the process creating the country's largest telecom entity.

The combined entity will have roughly Rs 80,000 crore of annual revenues and 400 million customers which translate to a 41 per cent market share by revenues, and 35 percent market share by subscribers.

Infographic (8)

Reacting to the news, stock shot up by about 15 per cent in morning trade but failed to hold gains. It quickly turned negative as traders realised that it is not as lucrative as it was sought out to be. Also, most of the positive is already in the price.

In the three years from the closure of the deal, the Aditya Birla Group has the right to buy up to 9.5 per cent stake from Vodafone at Rs 130 per share to equalise the stakes of both partners. The deal is expected to close sometime in the year 2018.

“The game has just started in the telecom sector. For the longest time the industry was in a state of equilibrium where Bharti Airtel was happy with the number 1 position, Vodafone at number 2, followed by Idea,” Neelkanth Mishra, head of equity strategy for India at Credit Suisse said in an exclusive interview with CNBC-TV 18.

“Now we have three claimants who are trying to be number one. One of the companies has already claimed that they would like to settle at 50 per cent of market share. We will see pricing in telecom return as market share settle,” he said.

“It may be exciting as a whole for the economy as well as consumers but for the companies involved it would not be a pretty picture, stay cautious,” added Mishra.

Telecom sector has undergone change over the years especially after the entrance of Reliance Jio. While on one hand, the sector witnessed consolidation in terms of players, on the other hand, competitive intensity has been equally high, suggest experts.

“There has been cannibalisation with revenue models from voice to data and to that extent it gives level playing field to new entrant like Reliance Jio,” Abhishek Anand, Fund Manager at Centrum Broking for the story on Idea-Vodafone Merger told Moneycontrol.com.

“In the current scenario, while the merger of Vodafone-Idea makes them a dominant player, the competition could still be high in the data business within the industry,” Anand said.

Another important aspect which can’t be ignored is the leverage on the balance sheet of most telecom players. If the three telecom players, namely Bharti Airtel, Reliance Jio and now Vodofone-Idea Cellular get into price wars, margins could get constrained.

For any rerating, analysts need some real improvement in earnings from current levels to see companies make returns more than the cost of capital, suggest experts.

The current situation will not be appropriate for shareholders in terms of returns. “Three large players will try to create equilibrium with pricing, which, in the near term, may not be appropriate for shareholders,” Nilesh Shah of Kotak AMC said in an interview with CNBC-TV 18.

Disclosure: Reliance Industries, the parent company of Reliance Jio, owns Network 18 that publishes Moneycontrol.com.
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