Vodafone deal done, analysts see little boost immediately for Idea

Analysts do not expect any dramatic change in the fortunes of Idea Cellular post its merger with British telecom major Vodafone. The merged entity could be the largest mobile operator by customer and revenue market shares.

However, Abhishek Anand, Fund Manager, Centrum Broking, said the telecom sector has undergone many changes over the years. While on the one hand the sector witnessed consolidation in terms of players, on the other hand, competitive intensity has been equally high. There has been cannibalisation of the revenue model — from voice to data — and to that extent it now provides a level-playing field to new entrant Reliance Jio.

“The balance sheet of players are highly leveraged, we need to see real improvement in earnings from current levels to see companies make returns more than the cost of capital. In the current scenario, while the merger of Vodafone-Idea makes them a dominant player, competition could still be high in the data business within the industry,” he added.

Gautam Duggad, Head — Research, Motilal Oswal Securities, said: “The deal at 1:1 share swap is in line with expectations. We reiterate that the Idea stock is no more a call on valuation but on the potential earnings revision possibilities. Over FY16-21E, we are currently building about 250-300 bps market share dilution for Idea and Vodafone each versus Bharti’s 50 bps market share loss. If the deal goes through, given the merged firm’s superior spectrum/network position, higher revenue market share and about 20-25 per cent lower capex requirements, the high free-cash-flow could reach about ₹8,000-10,000 crore, which could be used to strengthen the market position.”

With the merger now finally taking shape, the telecom industry is firmly moving towards consolidation and exit of smaller players having far lesser spectrum capacity and pricing prowess is on the cards, said Angel Broking in a report.

“The consolidation in the telecom industry through the Idea-Vodafone merger, acquisition of spectrum from other operators by Bharti Airtel and market share gains by Jio would ensure competitive and demanding times for telecom operators. But the consumer is having the last laugh at their expense, at the current juncture,” it added.