Hold Vodafone Idea; target of Rs 40: ICICI Direct

ICICI Direct's research report on Vodafone Idea

We attended the analyst meet of Vodafone Idea wherein the management outlined its strategy in terms of network integration & expansion, product segregation & pricing, capital raising and overall synergy fructification timelines. Among noteworthy highlights of the meet was the management’s reiteration that overall synergy benefits of Rs 14,0000 crore (opex Rs 8,400 crore and remaining capex) would be achieved now within 18-24 months vs. four year’s guidance earlier. Furthermore, the company also laid out equity capital raising plans up to Rs 25,000 crore, with promoter shareholders indicating support up to Rs 18,250 crore (Vodafone - Rs 11,000 crore & Idea - Rs 7250 crore). Overall capex is pegged at Rs 27,000 crore (plus ~Rs 6200 crore benefits from reuse of equipment) over FY19 and FY20. With a major driver of earnings recovery being market repair (pricing uptick), which is still not visible, we maintain HOLD rating.

Outlook

While the merger is largely complete and expedited synergy remains a silver lining, the competitive scenario is far from over. Notwithstanding fund raising & fibre and tower asset sale, industry repair remains a key variable for recovery. We lower our ARPU and margin estimates and bake in proposed Rs 25000 crore equity raising (Q4FY19) in our estimates. We maintain HOLD rating and lower our target price to Rs 40 on a DCF based methodology. We would monitor the industry development closely and turn constructive only when we witness signs of a pricing recovery.