Idea Cellular-Vodafone India could see a whopping USD 5 billion reduction in net debt through a mix of capital infusions and tower sales ahead of their mega merger that is reckoned to close as early as March, analysts said, adding that this has been necessitated by a sharp decline in operating incomes.

Idea shares surged 10.7 percent to Rs 115.65 on BSE, a day after the no. 3 carrier announced a Rs 3,250 crore capital raise from promoters, Aditya Birla Group, with plans to evaluate further capital raising up to Rs 3,500 crore to cut debt and free up cash for expansion. In the aftermath of Idea's Rs 3,250 crore preferential allotment to promoters, brokerage CLSA said Vodafone may also take steps to potentially reduce debt by Rs 9,400 crore pre-merger.

"The merged entity could see deleveraging of USD 5 billion led by capital infusions and sale of tower assets in the run up to their merger," CLSA said in a note seen by ET.

Analysts said capital infusion by Idea's promoters had been almost forced, in the first place, by the sharp fall in the earnings before interest, tax, depreciation and amortization (Ebitda) of both telcos under huge competitive pressure from Reliance Jio and market leader Bharti Airtel.

Credit Suisse said business trajectory had sharply declined since the merger announcement last year, noting that "Idea and Vodafone India's Ebitda levels had fallen 31 percent and 21 percent respectively, while net debt had gone up 10 percent". The Swiss brokerage said total Rs 6,750 crore capital infusion plan announced by Idea, would reduce "leverage ratio by 0.8-0.9 times, which is at least a minor relief ".

Kotak Securities backed the view, saying a "lower starting leverage for the merged entity is comforting from a competitive positioning standpoint". According to Kotak, Idea's net debt, including accrued interest on loans, stood at Rs 56,800 crore at end of September quarter, while Vodafone India's was Rs 61,800 crore.

Despite the infusion, Goldman Sachs does not foresee any meaningful uptick in Idea's nearterm capex, but said capital infusion "is likely to increase market confidence in the commitment of promoter entities" towards Idea.

"The proposed capital infusion shows the continued support of the Aditya Birla Group to Idea, which will potentially help increase shareholder confidence," especially amid "investor queries regarding the level of commitment of the promoter entities to the telecom business," said the US brokerage in a note to clients.

Bank of America-Merrill Lynch, in turn, said Idea's fund raising would be used to strengthen the balance sheet of the joint entity. The fund raising, it estimated, "could reduce the Idea-Vodafone entity's combined net debt/Ebitda gearing to 7.2 times from 8 times," which increases the risk of higher capex spending by the merged entity.

Analysts said an early merger is critical for both Idea and Vodafone to address their inadequacy in data spectrum vs Bharti Airtel and Reliance Jio Infocomm. "On merger, Idea-Vodafone could begin integrating spectrum and network, which in turn could drive early synergies worth Rs 1,700 crore," said CLSA. – Gadgets Now 


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