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Idea-Vodafone may need Rs 3,000 crore equity infusion to cut leverage ratio

Idea Cellular's promoters, the Aditya Birla Group, and ..

Idea Cellular's promoters, the Aditya Birla Group, and UK's Vodafone Group Plc may need to inject a further Rs 2,500-3,000 crore equity to lower leverage ratio of the proposed Idea-Vodafone combined entity to the targeted level of 6.5 times the operating income at the merger's close, analysts said.

Idea's high leverage ratio, they said, is the prime cause of worry amid Reliance Jio Infocomm's onslaught.

This is especially since Idea's present monestisation options — including the announced capital raising initiative by its promoters, a potential sale of its 11.15% in Indus Towers coupled with proceeds from sale of its captive towers to American Tower Corp (ATC) — may not be enough to bring down leverage ratio in the run up its proposed merger with Vodafone.

"Idea's net debt to Ebitda at 11.4x is approaching alarming levels. Even if we take in a net debt reduction from all current monetisation alternatives, such as the Rs 6,750-crore equity infusion, its stake sale in Indus Towers and (standalone) tower sale proceeds, leverage would drop to 8.3x, which is still very high," J P Morgan said in a note seen by ET.

The current leverage level is well ahead of the 6.5 times level agreed to by the two sides at merger close.

Mayuresh Joshi, fund manager and telecoms expert at Angel Broking, backed the view. "Idea's promoters and Vodafone may soon have to jointly consider additional equity infusion to achieve the targeted leverage ratio of the merged entity, as Idea's high leverage is unlikely to disappear fast as ARPU downtrending and Ebitda contraction is likely to continue in the coming quarters amid renewed pricing aggression from Jio and Bharti Airtel," Joshi said.

An analyst at a foreign brokerage said the two may need to infuse Rs 2,500-3,000 crore to meet the targeted leverage level at merger close.

The duo can decide to change the leverage levels, analysts said. Idea and Vodafone expect the merger to close in the first half of 2018, with many expecting it in March-April.

Idea, the country's third-largest carrier, posted a loss of Rs 1,285.6 crore — its largest-ever in a quarter — in the three months to December, with revenue falling nearly 13% to Rs 6,509.7 crore and a 21% sequential fall to Rs 1,223.3 crore in earnings before interest, tax, depreciation and amortisation (Ebitda), hit by the steep cut in network interconnect fees and the continuing price war in the sector fuelled by Jio.

Idea's net debt, in turn, climbed to Rs 55,800 crore at the end of December, from Rs 54,000 crore in the September quarter, driven by about Rs 1,750-crore capex spends in the three months to December. Vodafone India's net debt stood at Rs 61,800 crore in the fiscal second quarter.

Idea's leverage ratio has shot up over the past three quarters from 7.2 times operating income in the fiscal first quarter to 11.4 times in the three months to December.

On the other hand, market leader Airtel has exhibited a better grip on this key financial metric, restricting its net debt to operating income to three times in the December quarter, from 2.8 times in the April-June period.

Brokerage JM Financial said Idea's promoters and Vodafone Group Plc "may need to signal greater commitment to preempt Jio and Airtel from pushing the industry into a war of attrition," especially as Idea's operating income is estimated to decline further and bottom out in the fourth quarter.

Email queries sent to Idea and Vodafone on whether they would explore additional equity infusion up to Rs 3,000 crore remained unanswered as of press time on Friday.

According to JP Morgan, Idea's high leverage will also "limit its ability to invest and compete with Jio and Airtel."

Analysts at IDFC voiced concern on Idea's "stretched balance sheet," saying, "Capex needs to accelerate as data adoption becomes more mainstream and demand gets more volume-centric."

Idea said it had invested Rs 1,750 crore in the just-ended quarter, a fraction of the Rs 7,000 crore and nearly Rs 6,000 crore Jio and Airtel had invested, respectively. In fact, Idea's capex for the full fiscal was raised to Rs 7,000 crore, from Rs 6,000 crore.

"Idea will have to fight on multiple fronts – synergies, capex, market share defence and balance sheet repair," the brokerage said.

Dragged by the limited capex spend, analysts estimate Idea and Vodafone to individually fall behind Jio in terms of revenue market share by the end of the next fiscal year.

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