Idea Cellular
BSE SENSEX
33,970
S&P CNX
10,505
4 January 2018
Update
| Sector:
Telecom
CMP: INR105
TP: INR120 (+15%)
Buy
Board approves raising INR32.5b via preferential issue
To provide much-needed liquidity amid high competitive intensity
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
IDEA IN
3,607
124 / 67
9/17/13
310.9
4.8
1944
57.6
Financials Snapshot (INR b)
Y/E Mar
2017 2018E 2019E
Net Sales
355.8 289.6 296.6
EBITDA
102.8
57.5
63.2
NP
-4.0
-47.6 -46.5
EPS (INR)
-1.1
-12.1 -11.8
EPS Gr. (%)
-116.2 992.6
-2.3
BV/Sh. (INR)
68.6
59.1
47.2
RoE (%)
-1.7
-19.9 -22.3
RoCE (%)
1.6
-2.3
-2.2
P/E (x)
-94.3
-8.6
-8.8
P/BV (x)
1.5
1.8
2.2
EV/EBITDA (x)
8.4
15.3
14.3
Shareholding pattern (%)
As On
Sep-17 Jun-17 Sep-16
Promoter
42.4
42.4
42.2
DII
8.5
8.8
6.6
FII
26.5
25.9
25.1
Others
22.6
22.9
26.1
FII Includes depository receipts
Stock Performance (1-year)
Idea Cellular
Sensex - Rebased
130
110
90
70
50
Idea Cellular (IDEA) announced that the board has approved raising INR32.5b
via issuance of preferential shares to the Aditya Birla Group (ABG) at
INR99.5/share, implying 9% equity dilution. The board is also considering
raising additional INR35b, implying further 9% dilution.
In our view, equity dilution will take away potential gains from existing
shareholders, as the telecom market is likely to bottom out in the near term.
At the same time, we believe that fund-raising should provide IDEA with
much-needed liquidity to ramp-up network and protect market share against
its deep-pocketed peers, providing an edge in the current hyper-competitive
market.
IDEA’s FY18 net debt-to-EBITDA is estimated at a steep 9.3x. However, the
combined net debt post the merger with Vodafone could drop by INR225b to
INR871b, with net debt-to-EBITDA declining to 4.2x in FY20 and ~3x by FY21.
The stock is valued at 8.1x EV/EBITDA on FY20E combined EBITDA, factoring
in debt reduction and EBITDA synergies (720bp lower than Bharti). We have
revised our target price to INR120, with 8.7x EV/EBITDA for the combined
entity. We reiterate our Buy rating.
Issuance of preferential shares to dilute equity by 9%...
IDEA’s board approved to raise INR32.5b via preferential allotment of 326.6m
shares at INR99.5/share to promoter group companies (excluding the two listed
entities – Grasim and Hindalco). Additionally, it is also considering raising INR35b
via options such as preferential issue, QIP or rights issue. We note that the 326.6m
share issue will dilute its current equity base of 3.6b shares by 9%. If IDEA raises
additional equity of INR35b at a similar price (i.e. ~INR100), it would lead to overall
equity dilution of 19%. The company’s (ex-merger) EPS for FY19E stands at -INR13.
However, we note that combined EBITDA for Vodafone-Idea should potentially
grow at a CAGR of 28% over FY18-20E to INR210b, with a 10pp margin jump to
30%, led by steep synergy gains. This could pose upside risk to our current net loss
estimates.
…but provide wherewithal/war chest in a highly competitive market
Equity dilution of 9% will take away potential gains from existing investors, as we
expect the sector to bottom out over the next two quarters. However, in the
current hyper-competitive market – where deep-pocketed peers would see
Vodafone-Idea’s vulnerable leverage position as an opportunity to squeeze
liquidity and grab market share – we see fund-raising as a strong proactive action
from management. Equity funding will allow IDEA to a) support accelerated
network investment, b) protect its revenue/subscriber market share and c) create
war chest and also perception in the marketplace that Vodafone-Idea combined
stand in a strong cash liquidity position (even as the Vodafone-Idea merger moves
in a difficult phase). This could possibly settle the dust, as three large players –
Bharti, Vodafone-Idea and RJio – with similar market shares and steady FCF may
drive ARPU accretion instead of undercutting each other.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Aliasgar
Shakir
– Research Analyst
(Aliasgar.Shakir@motilaloswal.com); +91 022 6129 1565
Hafeez Patel
– Research Analyst
(Hafeez.Patel@motilaloswal.com); +91 22 3010 2611

Idea Cellular
Expect net debt to EBITDA to reduce sharply post-merger
We estimate IDEA’s net debt at INR535b for FY18. However, the combine net debt
post the merger with Vodafone could drop by INR225b to INR871b, led by a)
INR78.5b tower proceeds from sale of Vodafone and Idea towers to ATC, b)
INR32.5b preferential issue to ABG and c) INR82b estimated value of Idea’s 11%
share in Indus. Net debt may go down further if IDEA raises additional INR35b, as
mentioned in its 4
th
January 2018 press release.
IDEA’s FY18 estimated net debt-to-EBITDA stands at a steep 9.3x. However, the
combined entity’s (Vodafone-Idea) net debt-to-EBITDA can go down to 4.2x in FY20
and ~3x by FY21, led by a) a reduction in overall net debt by INR225b for the
combined entity and b) EBITDA CAGR of 28% to INR210b over FY18-20. Our EBITDA
growth reflects 10pp synergy gains, but only 4% revenue CAGR over FY18-20.
Promoter shareholding to be 23.6% post-merger
Post the announced fund-raising by issuance of preferential shares to the promoter,
ABG Group’s shareholding will increase by 4.8% to 47.2%. However, post the merger
with Vodafone, it will be lowered to 23.6%, with an opportunity to increase stake by
2.5% to 26%. Additionally, as decided in merger contours with Vodafone, ABG Group
will have an opportunity to raise its stake to 37.5% in four years post-merger.
Otherwise, Vodafone will have to equalize its stake at par with ABG Group.
Fund raising in telecom – a welcome positive
In a sector that remains highly leveraged, equity dilution is seen as a welcome
positive, which may a) support debt position and b) signal return of equity
investments in the sector to support growth.
Valuation – merger synergies not captured adequately
At CMP, the stock appears expensive at an EV/EBITDA of 11x (FY20E), excluding
Vodafone numbers. The stock is valued at 8.1x EV/EBITDA on FY20E combined
Vodafone-Idea EBITDA, factoring in debt reduction and EBITDA synergies. Our
estimated Vodafone-Idea EBITDA margin of 30% (building synergies) in FY20 is still
720bp lower v/s Bharti FY20 estimates, despite their similar revenue market shares.
This highlights the room for margin improvement. We have revised our TP to
INR120, with 13x on Idea’s EBITDA. Implied EV/EBITDA for the combined entity is
8.7x on FY20E. We reiterate our
Buy
rating.
Exhibit 1: Valuation Summary (INR b)
Consol EBITDA
Less Net debt
Total Value
Shares o/s (b)
CMP (INR)
Upside (%)
Methodology
Dec-19 EV/EBITDA
Driver (INR b)
77
Multiple (x)
13
Fair Value (INR b)
991
517
473
3.9
Value/sh (INR)
252
132
120
105
15
Source: MOSL, Company
4 January 2018
2

Idea Cellular
Exhibit 2: Pro forma statement for Vodafone-Idea merged entity (INR m)
INR m
Announced Approval Year 1 Year 2
stage
FY17
FY18
FY19
FY20
7,63,077 6,47,137 6,79,324 6,98,351
-3%
-15%
5%
3%
2,19,083 1,28,435 1,44,792 1,88,555
29%
20%
21%
27%
-12%
-41%
13%
30%
0
21,000
Year 3
FY21
7,49,768
7%
2,24,930
30%
19%
50,400
2,75,330
37%
8,70,620
Year 4
FY22
8,47,269
13%
2,71,126
32%
21%
67,200
3,38,326
40%
8,70,620
8,26,098
16,96,718
5.0
2.6
Comments
Revenue
Growth (%)
EBITDA
Margin (%)
Growth (%)
Synergy
Factoring 200-350bp market share dilution
for Vodafone and Idea over FY16-21E
Building recovery from FY19E
Opex synergy is 60% of INR 140b total.
Building 0% synergy in FY19 and 80%
synergy in 4th year - FY22
EBITDA (post synergy)
2,19,083 1,28,435 1,44,792 2,09,555
Margin (post synergy) (%)
29%
20%
21%
30%
Net Debt
10,30,620 8,70,620 8,70,620 8,70,620
Market cap
EV
EV/EBITDA (x)
Net Debt to EBITDA (x)
8,26,098 8,26,098 8,26,098 8,26,098 8,26,098
18,56,718 16,96,718 16,96,718 16,96,718 16,96,718
8.5
13.2
11.7
8.1
6.2
4.7
6.8
6.0
4.2
3.2
Factoring debt reduction of INR 78.5b due
to tower sale in FY18.
Value accretion only from FY20E
Source: MOSL, Company
Exhibit 3: Summary of promoter shareholding
Particulars
Shares outstanding as on Sept-17
Add: Preferential issue shares to be issued
Shares outstanding post preferential issue
Add: Shares to be issued to Vodafone India
Shares outstanding post-merger
Total No of
shares (m)
3,607.2
326.6
3,933.8
3,933.8
7,867.6
Promoter group holding
No of shares (m)
As a % of total shares
1,528.7
42.4%
326.6
9.1%
1,855.3
47.2%
1,855.3
23.6%
Source: MOSL, Company
Exhibit 4: Net debt to come down significantly post preferential issue
FY18 (INR m)
Idea net debt
Vodafone net debt
Combine net debt
Vodafone and Idea tower sale
Idea's 11% Indus Stake sale
Total Net Debt
Pre
5,35,410
5,60,210
10,95,620
change
-32,500
-32,500
-65,000
Post
5,02,910
5,27,710
10,30,620
-78,500
-81,500
8,70,620
10,95,620
-2,25,000
Source: MOSL, Company
4 January 2018
3

Idea Cellular
Story in charts
Exhibit 5: Idea: Subscriber and gross revenue market share
(%)
Gross Subscriber market share (%)
Gross revenue market share (%)
Exhibit 6: Idea: ARPU and RPM trajectory
Monthly ARPU (INR)
Mobile RPM (p)
Voice RPM (p)
48 47
44 45 45 44 45 46 46 45 44 45 44 46
41
35 32
29
37 38 38 37 37 36 36 34
33 32 32 33 34 33
29 26 24 22
Source: TRAI, MOSL
Source: Company, MOSL
Exhibit 7: Idea: Voice traffic and QoQ growth
Voice traffic (b minutes)
2.8
4.1
8.6
5.2
5.1
8.4
5.8
5.1
1.2
QoQ growth (%)
7.3 10.3
-1.1
-1.9
8.4
1.7
Exhibit 8: Idea: Monthly churn (%)
Monthly churn (%)
-5.8
-1.7
-3.2
Source: Company, MOSL
Source: Company, MOSL
Exhibit 9: Idea: Data traffic and QoQ growth
Data traffic (b MB)
QoQ growth
Exhibit 10: Idea: Data revenue per MB (p)
Data revenue per MB (p)
Source: Company, MOSL
Source: Company, MOSL
4 January 2018
4

Idea Cellular
Exhibit 11: Idea: Revenue & EBITDA margin trend
Revenue (INR b)
EBITDA margin (%)
Exhibit 12: Idea: Net debt and net debt/EBITDA trend
Net debt (INR b)
Net debt/EBITDA (x)
36 34 35 35 38
33 31
32 31 31 32 33 33 34
25 26 23
20
Source: MOSL, Company
Source: MOSL, Company
4 January 2018
5

Idea Cellular
Financials and Valuations
Consolidated - Income Statement
Y/E March
Total Income from Operations
Change (%)
Total Expenditure
% of Sales
EBITDA
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
PBT bef. EO Exp.
Share of profits of associates
PBT after EO Exp.
Total Tax
Tax Rate (%)
Minority Interest
Reported PAT
Adjusted PAT
Change (%)
Margin (%)
FY13
2,24,577
14.9
1,64,531
73.3
60,045
26.7
34,778
25,268
9,495
15,773
0
15,773
5,664
35.9
0
10,109
10,109
39.8
4.5
FY14
2,65,189
18.1
1,81,852
68.6
83,337
31.4
45,194
38,143
7,700
30,443
0
30,443
10,765
35.4
0
19,678
19,678
94.7
7.4
FY15
3,15,709
19.1
2,07,592
65.8
1,08,117
34.2
53,036
55,081
5,755
49,325
0
49,325
17,396
35.3
0
31,929
31,929
62.3
10.1
FY16
3,59,494
13.9
2,39,818
66.7
1,19,676
33.3
62,561
57,115
18,831
38,284
4,217
42,501
15,220
35.8
0
27,281
24,574
-14.6
7.6
FY17
3,55,758
-1.0
2,52,995
71.1
1,02,763
28.9
78,272
24,491
37,342
-12,851
4,218
-8,633
-4,636
53.7
0
-3,997
-3,997
-114.7
-1.1
FY18E
2,89,597
-18.6
2,32,122
80.2
57,475
19.8
86,175
-28,700
46,867
-75,567
3,398
-72,169
-24,539
34.0
0
-47,629
-47,629
1,091.6
-16.4
(INR Million)
FY19E
2,96,592
2.4
2,33,376
78.7
63,216
21.3
89,395
-26,179
46,800
-72,979
3,687
-69,291
-22,780
32.9
0
-46,511
-46,511
-2.3
-15.7
FY20E
3,31,206
11.7
2,49,100
75.2
82,106
24.8
95,570
-13,464
44,200
-57,664
3,991
-53,673
-17,613
32.8
0
-36,060
-38,741
-16.7
-11.7
Consolidated - Balance Sheet
Y/E March
Equity Share Capital
Total Reserves
Net Worth
Total Loans
Deferred Tax Liabilities
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Goodwill on Consolidation
Capital WIP
Total Investments
Curr. Assets, Loans&Adv.
Inventory
Account Receivables
Cash and Bank Balance
Loans and Advances
Curr. Liability & Prov.
Account Payables
Provisions
Net Current Assets
Appl. of Funds
E: MOSL Estimates
FY13
33,143
1,11,073
1,44,217
1,40,438
11,180
2,95,834
4,67,357
1,75,818
2,91,539
61
8,811
10,280
53,092
726
9,601
1,429
41,336
67,949
64,719
3,230
-14,857
2,95,834
FY14
33,196
1,32,073
1,65,269
2,06,350
18,133
3,89,752
5,16,970
2,21,012
2,95,958
61
1,14,194
2,155
53,206
683
8,006
1,881
42,636
75,823
68,960
6,863
-22,616
3,89,752
FY15
35,978
1,94,314
2,30,292
2,68,591
19,015
5,17,898
6,18,207
2,62,871
3,55,336
61
51,405
1,15,267
82,598
710
9,789
15,537
56,562
86,769
78,013
8,756
-4,171
5,17,898
FY16
36,005
1,99,500
2,35,505
4,05,413
19,539
6,60,457
7,13,532
61,692
6,51,840
61
60,397
34,709
54,247
1,065
11,424
7,691
34,067
1,40,798
1,36,418
4,380
-86,550
6,60,458
FY17
36,053
2,11,269
2,47,322
5,50,545
13,218
8,11,085
9,06,838
1,39,267
7,67,571
61
75,351
63,783
59,912
588
13,139
827
45,358
1,55,592
1,51,551
4,041
-95,681
8,11,085
FY18E
39,319
1,92,870
2,32,189
5,83,200
13,218
8,28,607
9,71,838
2,25,442
7,46,396
61
75,351
63,783
80,057
918
11,889
16,507
50,743
1,37,041
1,33,156
3,885
-56,984
8,28,607
(INR Million)
FY19E
39,319
1,46,359
1,85,678
6,27,521
13,218
8,26,417
10,36,838
3,14,837
7,22,001
61
75,351
63,783
1,05,829
624
12,176
37,863
55,165
1,40,608
1,36,375
4,233
-34,779
8,26,417
FY20E
39,319
1,10,299
1,49,618
6,44,541
13,218
8,07,378
11,01,838
4,10,407
6,91,431
61
75,351
63,783
1,32,079
1,098
13,599
55,258
62,124
1,55,327
1,50,494
4,833
-23,248
8,07,378
4 January 2018
6

Idea Cellular
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Fixed Asset Turnover (x)
Asset Turnover (x)
Inventory (Days)
Debtor (Days)
Leverage Ratio (x)
Current Ratio
Interest Cover Ratio
Net Debt/Equity
FY13
2.8
13.5
43.5
0.3
11.5
FY14
5.5
19.5
49.8
0.4
7.9
19.1
FY15
8.9
23.6
64.0
0.6
8.1
11.8
4.4
1.6
2.0
4.8
0.6
16.1
8.2
11.7
0.5
0.6
1
11
1.0
9.6
0.6
FY16
6.8
24.2
65.4
0.6
9.5
15.3
4.3
1.6
2.2
6.2
0.6
10.6
6.4
8.2
0.5
0.5
1
12
0.4
3.0
1.5
FY17
-1.1
20.6
68.6
0.0
0.0
-94.3
5.1
1.5
2.6
8.4
0.0
-1.7
1.6
1.8
0.4
0.4
1
13
0.4
0.7
2.0
FY18E
-12.1
9.8
59.1
0.0
0.0
-8.6
10.7
1.8
3.3
15.3
0.0
-19.9
-2.3
-2.8
0.3
0.3
1
15
0.6
-0.6
2.2
FY19E
-11.8
10.9
47.2
0.0
0.0
-8.8
9.6
2.2
3.3
14.3
0.0
-22.3
-2.2
-2.7
0.3
0.4
1
15
0.8
-0.6
2.8
FY20E
-10.8
15.8
41.6
0.0
0.0
-9.7
6.6
2.5
2.9
11.0
0.0
-23.1
-1.1
-1.4
0.3
0.4
1
15
0.9
-0.3
3.5
0.3
7.4
5.9
6.0
0.5
0.8
1
16
0.8
2.7
0.9
6.9
0.4
12.7
7.5
9.0
0.5
0.7
1
11
0.7
5.0
1.2
Consolidated - Cash Flow Statement
Y/E March
OP/(Loss) before Tax
Depreciation
Interest & Finance Charges
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
Others
CF from Operating incl EO
(Inc)/Dec in FA
Free Cash Flow
(Pur)/Sale of Investments
Others
CF from Investments
Issue of Shares
Inc/(Dec) in Debt
Interest Paid
Dividend Paid
Others
CF from Fin. Activity
Inc/Dec of Cash
Opening Balance
Closing Balance
E: MOSL Estimates
FY13
10,109
34,778
9,963
-4,110
6,096
56,836
6,135
62,971
-34,766
28,205
0
657
-34,109
248
-10,368
-9,283
-250
0
-19,653
9,209
1,521
1,429
FY14
19,678
45,194
8,564
-6,384
5,354
72,406
9,786
82,192
-36,448
45,744
0
-29,194
-65,642
263
-15,936
-7,682
-1,306
0
-24,661
-8,111
10,729
1,881
FY15
31,929
53,036
9,337
-11,043
5,540
88,800
15,379
1,04,179
-41,576
62,603
0
-15,680
-57,256
37,374
52,355
-6,656
-2,792
0
80,280
1,27,202
3,543
15,537
FY16
42,501
62,561
20,685
-8,611
-3,980
1,13,155
-3,669
1,09,486
-1,29,118
-19,632
1,03,909
2,835
-22,373
175
-86,485
-4,393
-2,598
0
-93,301
-6,188
13,879
7,691
FY17
-8,632
78,272
39,736
-6,808
6,960
1,09,527
-4,154
1,05,373
-1,26,319
-20,946
-33,472
4,626
-1,55,165
-4,453
84,297
-32,800
-2,599
1
44,445
-5,346
6,174
827
FY18E
-47,629
86,175
46,867
0
-23,016
62,397
0
62,397
-65,000
-2,603
0
0
-65,000
32,497
32,655
-46,867
0
390
18,675
16,072
435
16,507
(INR Million)
FY19E
-46,511
89,395
46,800
0
-848
88,836
0
88,836
-65,000
23,836
0
0
-65,000
0
44,321
-46,800
0
0
-2,479
21,356
16,507
37,863
FY20E
-36,060
95,570
44,200
0
5,864
1,09,574
0
1,09,574
-65,000
44,574
0
0
-65,000
0
17,021
-44,200
0
0
-27,179
17,395
37,863
55,258
4 January 2018
7

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Idea Cellular
Disclosure of Interest Statement
Analyst ownership of the stock
Idea Cellular
No
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Equity products
4 January 2018
8