Based on the recommendations of the Inter Ministerial Group (IMG), the Union Cabinet has approved a relief package to the debt ridden telecom sector. Under the new plan, spectrum payment liabilities would be paid over a period of 16 years against 10 years at present. The plan also called for relaxed spectrum-holding limit for telecom operators to 35% from 25% at present and lowering the interest rate on penalties on outstanding dues from 14% to 12%.
These measures are a welcome relief for an embattled telecom sector, which has been facing heavy competition from Reliance Jio as well as service mammoth debt totalling Rs4.6 lakh cr. These measures are expected to increase telecom operators’ cash flow by reducing spectrum payments. The news regarding the hiking of spectrum limit is also particularly beneficial for Idea Cellular and Vodafone. Idea Cellular and Vodafone’s merger prospects faced certain operational constraints due to the earlier spectrum holding limit of 25%. By hiking the spectrum holding limit, the government would now be encouraging further consolidation of the telecom industry.
Idea Cellular, a wireless operator, is the third largest mobile service provider in India. In October 2017, Idea Cellular received approval from the shareholders and creditors of the company to proceed with its merger with Vodafone. The combined entity would have a subscriber base of ~450 million subscribers. The new entity would also have a total spectrum of 1,850 MHz. As per Management statements, the merger is expected to be complete in 2018. The company recently announced a capital raising plan of Rs 6,750cr through a preferential share allotment as well as QIP. As per the merger agreement, the net debt-to-EBITDA of the new merged entity was not to exceed 6.5 times. However, the company's losses in 1HFY18 pushed the merged entity’s net debt-to-EBITDA slightly above 6.5 times raising concerns over the viability of the merger.
We expect the company to report revenue de-growth of 2.6% over FY17-19E due to (a) 18.5% reduction in voice revenues over FY17-19E due to a ~48% reduction in voice revenue per minute, and (b) intense competition to reduce data rates by ~85% over FY17-19E. EBITDA margin is also expected to decline by 815bps to 20.6% in FY19E. The stock is currently trading at 11.6x FY19E EBITDA.