Why the sudden excitement? Struggle to validate new reasons :: Nomura Research

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Assessing recent excitement – maintain Reduce

We maintain Reduce on IDEA with a INR135 PT. Of the two concerns we had 

– R-Jio and spectrum auctions – the first one is perhaps delayed a bit, and 

while there is more regulatory clarity following auctions, the final prices were 

almost 50% higher than our and market forecasts. Still, the sentiment seems 

to have improved on expectations that incumbents can raise prices and gain 

share too. The price increase rhetoric has been around for a while we note,

but implementation hasn’t been straight-forward. Hence, we struggle to 

understand the new potential now vs a few months back. IDEA’s execution 

has and should remain superior, but we make the following points:

• Hard to argue that recent auctions are significantly equity accretive.

New debt post the auctions will be USD5bn, which is 50% higher than most 

forecasts we had come across, or an additional debt of USD1.5bn. Unless 

one believes that operational value can rise much more than that, it is hard 

to argue for significant higher equity value post the auctions. 

• Price increase outlook. In FY14, voice prices rose 5%, but in 9M15, these 

are actually down 3% y-y. For the next 2 years, we assume 1-2% pa 

increases too with 5-7% volume increases. We don’t see reasons to lift this 

further at this stage. Even for data, we assume 30-40% growth pa. 

• Competition rationalisation. In the past 2 years, the market has already 

consolidated a fair bit with revenue share for the top-3 telcos rising to 72% 

vs a 67% average in 2011-12. R-Jio launch, although delayed, is still ahead. 

• Earnings instability can create stock volatility. Post auctions, we increase 

our FY16 EPS by 18%, but cut FY17 EPS by 22%. We see IDEA returning 

to FY15 NPAT levels in FY18. A common pushback is that EPS doesn’t 

matter as D&A is non-cash and revenue/EBITDA growth matter more. 

Partially yes, but note that D&A is almost 50% of EBITDA, higher vs peers, 

and interest needs to be paid at 10% too.