Idea-Vodafone merger: What it means for telecom stocks and who gains most

Analysts expect heightened competitiion as operators align their strategies to compete with RJio

Idea Cellular – Vodafone merger news on Monday morning brought telecom stocks back in focus, with the BSE Telecom index outperforming the markets by rising 0.8% as compared to 0.4% fall in the S&P BSE Sensex.
 
The rally in individual stocks was much sharper, with Idea Cellular rallying over 3% to Rs 111 levels in early morning trade. The stock had rallied nearly 5% in opening moves to hit a high of Rs 123.75 on the BSE, but pared gains as trade progressed. By 10:15am, Idea Cellular was trading at Rs 100 levels, down nearly 7% from its previous close.

 
GTL Infra, Tata Teleservices Maharashtra (TTML), ITI, Reliance Communications (RCom) and Bharti Airtel also gained 0.2% - 2.7% in morning deals.

"The merger ratio is consistent with recommendations from the joint independent valuers. The implied enterprise value is Rs 82,800 crore ($12.4 billion) for Vodafone India and Rs 72,200 crore ($10.8 billion) for Idea excluding its stake in Indus Towers, valuing Vodafone India at 6.4x EV/LTM EBITDA and Idea excluding its stake in Indus Towers at 6.3x EV/LTM EBITDA," said Vodafone India in a release.
 
Over the past few months, Reliance Jio’s freebies and the new tariffs effective April 01 2017 and Bharti Airtel’s acquisition of Telenor India – the telecom sector has been buzzing with activity. While the S&P BSE Sensex has gained around 12% from its recent low in December 2016, the S&P BSE Telecom index has rallied 21.1% since then.

 
Given the recent developments and the rally seen in these stocks, analysts now remain cautious on the telecom sector. They expect heightened competitive intensity as incumbent operators align their strategies to compete with RJio. As regards Idea Cellular, most of the positives from the merger with Vodafone are priced in, they say.
 
Over the longer term, analysts at Jefferies expect the Indian telecom sector to remain a five-player market even if consolidation were to happen – three large (Airtel, Idea-Vodafone, R Jio), one smaller (R Com combine) and one fringe (BSNL-MTNL).

 
“The three equally strong competitors would be equally bad as fragmented competition (as at present) for incumbents. R Jio's aggressive stance (target of 50% market share) would make market dynamics even worse in the interim before some kind of a steady state is reached, which is still a while away, in our view," said Vaibhav Dhasmana of Jefferies.
 
Going ahead, Dhasmana expects Airtel to benefit more – gaining both in market share and spectrum which Idea-Vodafone merged entity would need to give up due to hitting M&A caps.


 
“In addition, the merger integration over a longer term could also provide opportunities to further gain share. We change our valuation methodology for Airtel, maintain Hold and continue to prefer over Idea. For Idea, the best case of merger synergies is already priced into the stock now with challenges around integration not completely factored in; maintain Underperform with a 12-month price target of Rs 90,” Dhasmana says.

 
“The situation in the telecom sector is very fluid at this moment as the entry of a large new player has completely changed the business dynamics. We believe it would take another 6 – 12 months for pricing to settle down and only then it would make sense to take a view on this sector,” said Tirthankar Patnaik, India Strategist at Mizuho Bank.
 
“One thing is clear though, the battle has clearly shifted from voice to data and the player which with the best data offering is likely to emerge as the winner. Given the recent volatility in stock prices, telecom is in a no-trade zone for us,” he adds.

 
If someone is taking a two- three year view, Kunj Bansal, ED & CIO, Centrum Wealth Management advises buying telecom stocks on a decline.


 
“The consolidation will lead to only three big players remaining in the telecom sector. As a result, hopefully the industry, after 6 - 12 months of intense competition, will regain its pricing power,” he says.
 
Adding: “From a short-term perspective, however, there could stoill be more challenges as the balance sheet of most of the players will continue to bleed and the P&Ls will remain under strain. As regards Idea - Vodafone deal, the recent surge in stock price already builds in most of the key positives.”