Hold Idea Cellular; target of Rs 110: JM Financial

JM Financial's research report on Idea Cellular

In a stock-exchange filing yesterday, Idea announced its Board would meet on 4th of January to consider equity-raising proposals. We believe fresh equity funding would allow Idea to better defend its revenues and market share (RMS) based on a hike in 4G/fibre capex, and/or help reduce its surging leverage ratio [net debt-to-EBITDA]. As of Sep-17, the pro-forma net debt of VI merge-co was INR 1106bn—implied LR being 6.6x based on TTM EBITDA. Even after incorporating INR 155bn of proceeds from tower-divestments (assuming sale of entire Indus holding by Idea), we estimate the LR would surge further to c.8x by Mar-18, well ahead of the 6.5x MCLR [Maximum Closing Leverage Ratio] agreed by principal shareholders of the two companies (i.e. ABG and Voda Plc).We do not expect Aditya Birla Group [ABG] to dilute its stake in Idea; as such, equity-raising may happen through a rights issue and/or a preferential issue to ABG, in our view. Rights issue done at a significant discount would be dilutive to fair value, but we expect investors to focus on the positives of fund-raising.

Outlook We retain our Hold rating on Idea shares, with a Mar-19 TP of INR 110.

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