(IDEA IN, Mkt Cap USD3.3b, CMP INR8.5, TP INR8.0, 6% Downside, Neutral)
- VIL reports flat EBITDA on QoQ (pre INDAS 116), despite a 2% ARPU growth and a 90bp SUC gain. This is a result of network cost increase and subscriber loss of 6m. 5G spectrum acquisition increased net debt to INR2.2t.
- Continued subscriber loss along with a slow 5G rollout, which is subject to capital infusion, is expected to dilute earnings. 2QFY23 annualized EBITDA of INR164b may not be sufficient to meet debt repayments, which includes intensive capex needs and the ability to compete fiercely to retain market share. We reiterate our Neutral rating.
4G subs and ARPU gain; EBITDA flat
- Revenue grew 2% QoQ to INR106b (in line), aided by 2% QoQ growth in ARPU. However, the subscriber base declines 2% QoQ, down 6m.
- Bharti/RJIo saw 4%/1% QoQ rise in ARPU to INR190/INR177 and subscriber adds of 7.7m/0.5m, respectively, in 2QFY23.
- The reported EBITDA declined 5% QoQ to INR41b (7% miss). However, the Pre IND-AS 116 Adj EBITDA was flat QoQ at INR21b (3% below estimates).
- SUC gains of 110bp (INR940m) attributed to 5G spectrum was offset by higher network cost and SG&A expenses.
- Subsequently, pre IND-AS 116 EBITDA margin declined 40bp QoQ to 20%, showing no incremental EBITDA margin (1QFY23 saw 82% incremental margin). Airtel/RJio saw 80% incremental margin.
- Net loss widened to INR76b in 2QFY23 v/s INR73b in 1QFY23 (13% miss) due to a 4% QoQ increase in finance cost to INR60b (15% miss)
- Net debt continued to increase, higher by INR220b to INR2.2t, primarily due to 5G spectrum of INR172.6b.
- Capex spend increased QoQ to INR12.1b in 2QFY23 from INR8.4b in 1QFY23. Cash capex for 1HFY23 was INR46.3b, including spectrum payment v/s INR 61b in FY22.
- FCFF was INR63b in 1HFY23 v/s INR1.1t in FY22.
Highlights from the management commentary
- The growth in ARPU is led by a) customer upgrade and b) tariff hikes. Although subscriber loss continues due to network woes in some areas, 4G subscriber base is seeing growth.
- VIL contributes 98% of revenue from the 14 circles and will continue to invest in the regions.
- The increasing churn and subsequently higher SG&A is reflecting the increased competitiveness for market share, which has offset SUC benefits
- The company is in discussion with banks for funding, which remains a key for 4G coverage extension and 5G rollout.
Valuation and view
- The ARPU growth of 26% over the last five quarters, on the back of tariff hikes and customer upgrade along with consistent 4G subscriber additions are the positives for IDEA. However, continued subscriber churn underscores its weakening market position, diluting the earnings growth opportunity needed to become self-sustainable.
- Its weak liquidity position may derail network investments.
- The recent government moratorium has partly released repayment woes, but it has ceded a significant 33% equity stake for merely the interest component with net debt ballooning to INR2.2t.
- The much-awaited capital raise remains critical to provide immediate liquidity for network expansion.
- The significant amount of cash required to service debt leaves limited upside opportunities for equity holders, despite the high operating leverage opportunity from any source of ARPU increase. The current low EBITDA will make it challenging to service debt without an external fund infusion. Assuming 12x EV/EBITDA, with a net debt INR2.2t, leaves limited opportunity for equity shareholders. We reiterate our Neutral rating.