Top-up vouchers for Aircel Ltd., clockwise from top left, Reliance Communications Ltd., Vodafone Group Plc, Bharti Airtel Ltd., and Idea Cellular Ltd. sit inside a box at a mobile phone store in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

Vodafone Idea Aims To Achieve Merger Synergies In Half The Time Anticipated

India’s largest telecom operator aims to achieve benefits from the merger earlier than expected amid a tariff war triggered by Reliance Jio Infocomm Ltd.

Vodafone Idea Ltd., which cut the merger synergy timeline to two years from four, expects to achieve the bulk of these benefits from lower costs related to network and IT, subscriber acquisition and customer services.

While announcing the merger, the U.K.-based Vodafone Group and Aditya Birla Group-controlled company estimated annual savings of Rs 14,000 crore. Of this, 60 percent would be on account of operational synergies and the rest from capital expenditure.

“Working on the synergies for the last 17 months gives us the assurance that we will be able to achieve them by FY21,” Balesh Sharma, chief executive officer of Vodafone Idea, said in a press meet.

Though analysts expect most of these synergies to be achievable, BloombergQuint’s calculations show that the net operational benefit would be significantly lower as erosion of earnings before interest, tax, depreciation and amortisation offsets all synergy gains targeted.

Vodafone India and Idea Cellular Ltd. in August received the last regulatory approval required for the merger of the two entities. The two operators agreed to combine as they were losing ground in the world’s second-biggest telecom market disrupted by Mukesh Ambani-led telecom upstart’s cheap data. Since the announcement of the merger, more than 80 percent of their operating profit has been wiped off.

Vodafone Idea, which reported its first quarterly numbers after merger, suffered a net loss of about Rs 5,000 crore. The company is planning to raise around Rs 25,000 crore. It’s also looking to sell its stake in Indus Towers Ltd. and monetise its fibre assets for deleveraging. Operational synergies, potential fundraising and stake sale in Indus Towers may help the company lower its leverage ratio, or net debt-to-Ebitda, to 6.3 times, according to BloombergQuint’s calculations.

Other Key Highlights:

  • Capital expenditure of Rs 27,000 crore for the ongoing and next financial year.
  • Investment focused on most profitable and attractive areas.
  • Improve 4G coverage and capacity in key areas.
  • Drive average revenue per user via simplification, rationalisation and upselling—persuade a customer to buy something additional.

Here’s what the brokerages have to say

UBS

  • Maintains ‘Neutral’ with a target price of Rs 37.
  • Rapid expansion of 4G coverage in the next six to 12 months.
  • Believes FY19-20 capex guidance to be low and implies recovery may take time.

Bank of America Merrill Lynch

  • Maintains ‘Underperform’ and cuts target price to Rs 35 from Rs 40 as the company is vulnerable to market share risks.
  • The company looks to maintain the No. 1 position with low capex and more synergies.
  • The management doesn’t expect price war to worsen; prices unsustainable even at current levels.

Motilal Oswal

  • Maintains ‘Buy’ and hikes target price to Rs 55 from Rs 50.
  • A gigantic task on hand; advancing operating expenditure/capex synergy target.
  • Sees headwinds in the form of network integration challenges and APRU downtrading.

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