On the back of a declining EBITDA (earnings before interest, taxes, depreciation, and amortisation), weaker subscriber base and competition from Reliance JioPhone, investment group CLSA has downgraded its rating of Idea Cellular from ‘buy’ to ‘sell’ with its target currently at Rs 51 per share from a previous Rs 70 per share.

“We cut our mergeco FY19-21CL forecast by 2 to 22 percent to factor in its Q1FY19 EBITDA miss, weak subscriber trends and 25 million subscriber churn at an Rs 70 ARPU (average revenue per user) for incremental risk to the Jiophone offer,” the brokerage said.

Company Financials

In the June quarter, Idea Cellular’s EBITDA was at Rs 640 crore, down 36 percent, missed due to higher operational costs. The company reported a net profit of Rs 260 crore from a one-off gain from tower sales to ATC Telecom and its ARPU was at Rs 100, down 5 percent.

The telecom company’s subscriber base fell to 6.6 million in a quarter over quarter basis and its data subscriber fell 0.3 million in the quarter to 46 million.

Reliance Jio

Tariff wars initiated by Reliance Jio could negatively impact earnings and leverage. Realisation of merger synergies will be key. While we ignore termination penalties of Rs 4,500-5,000 crore in our estimates, if levied these could materially hit stock valuations.

Idea-Vodafone Merger

While Idea and Vodafone got the approval of the department of telecommunication to go ahead with the merger with a combined synergy from the deal at Rs 8,400 crore, an additional Rs 1,000–7,700 crore could be added in the financial year, the financial firm said.

“While we build-in operating cost synergy from the shut-down of 70k sites due to the merger, we do not build-in termination penalties for exits of Rs 4,500 crore as this could be swapped for future tenancy commitments,” CLSA added.