The Idea Cellular stock gained nearly two per cent on Thursday after the company announced that its board has approved raising Rs 32.5 billion from promoter group entities through the issuance of equity shares on a preferential basis. The issue, expected to be completed by February, will lead to an increase in the promoter stake to 47.2 per cent from 42.4 per cent. The proposed fundraising, involving the issuance of 326 million shares at Rs 99.5 a share, will lead to a dilution of 8.3 per cent.
The company is also looking at raising a further Rs 35 billion through the equity route (preferential, qualified institutional placement, rights issue) which will take the overall fundraising to Rs 67.5 billion and the total dilution (if it is done at the same price) to 16.5 per cent.
The company indicated that the proposed fundraising, sale of tower assets to ATC and potential monetisation of Idea’s 11.15 per cent stake in Indus will help augment long-term capital resources. Idea is looking at expanding its wireless broadband coverage and capacity, especially 4G, and will soon launch voice over LTE services in this calendar year.
However, analysts at JM Financial say the fundraising proposal appears to be driven by merger conditions and not so much by immediate cash crunch or any breach of debt conditions. They believe that the company can fund its capital expenditure (capex) in the current fiscal year from a cash balance of Rs 28 billion and an operating cash flow of Rs 3-4 billion. Proceeds of Rs 40 billion from the sale of its own towers to ATC should help bridge the fund requirements in the first half of FY19. The issue is the maximum closing leverage ratio of 6.5 times combined net debt to operating profit for Idea and Vodafone if the transaction closes by March 2018 and six times if it closes by September this year.
Even if Idea were to sell its stake in Indus, coupled with own towers, the combined leverage ratio assuming total debt of Rs 1 trillion would be more than eight times, according to analysts. Idea had a debt of Rs 567.6 billion at the end of September, which will fall to Rs 500 billion after the equity transaction. Vodafone had a net debt of just under Rs 620 billion and is expected to keep its debt level at Rs 524 billion at the time of closure.
The leverage ratio conditions, however, can be jointly waived by the co-promoters Aditya Birla group and Vodafone Plc, according to merger agreement. The debt situation might not improve substantially in the near term, given the need to continuously upgrade the network. Mayuresh Joshi of Angel Broking said the dilution and merger will be earnings accretive over a two- to three-year period, given cost synergies on account of tower consolidation, stabilising average revenue per user and uptick in volume-driven data revenues in a four player market.