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The synergies from the union are adequately priced into the stock price, but the risks are not. The scale of the transaction and the time required during and after the union for operations to stabilise make these risks significant and understated at the current price. We tweak our sum-of-the-parts-based stock target price to now include the captive tower business into the core business, in line with the structure of the union announced and value the 11.15 per cent stake that Idea holds in Indus Towers separately. Our price target is reduced to Rs 85 (Rs 90 previously); we maintain 'underperform' rating.
While outlining aggressive cost synergies from the union, both Idea and Vodafone continued to paint a gloomy picture of the sector's revenue growth in FY18. The same remains challenging owing to newcomer Reliance Jio's gargantuan revenue market share aspirations, which continue to hurt telcos and pressure sector revenue. We remain sellers on Idea, given its history of over-optimism on synergy benefits.
MOTILAL OSWAL RESEARCH
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The transaction faces many challenges and would take almost a year to conclude. The joined-up telco would breach the spectrum holding cap in five circles in 900-megahertz (MHz) band and in two circles in the 2,500-MHz band; and likely to breach the revenue market share cap of 50 per cent in six circles. These would have to be resolved in a fixed time frame. Further, the debt levels of the joined-up telco would be high at Rs 1,08,000 crore, which translates into a debt/operating profit of 4.4. Both entities would have to inorganically deleverage to rein in the debt.
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Upside for Idea is restricted by (1) a hyper-competitive scenario, with Reliance Jio expected to remain aggressive in race to gain revenue market share; (2) long dated cost synergies; and (3) lack of debt reduction in medium term. Progress on regulatory approvals would also be closely watched as both entities have a number of pending litigation cases.
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