The Supreme Court verdict on AGR allowing 10 years staggered payment and clarifying on spectrum trading/sharing liabilities, possibly marks the end of a long drawn legal tangle. For the sector, as a whole, the issues now shift to tariff hike, which will be the key determinant to the path of improvement in cash flow generation, return ratio and survival in case of Vodafone Idea (VIL). For Bharti Airtel (assuming it also has to pay Videocon s dues), annuity payment of | 4638 crore from FY22 end onwards, will not be a major issue. However, VIL which has already been plagued by cash burns will find it difficult to meet the demand of annuity payment of | 8391 crore from FY22 end onwards. Apart from tariff hike (to the tune of ~92%), it would also need immediate capital infusion to bridge the cash gap. The judgement requires 10% of total dues to be paid before March 31, 2021 and remaining in 10 equal instalments. We assume that since both VIL and Bharti have already paid more than 10% of dues, payout should begin from FY22 end.
VIL now needs immediate substantial fund raise, tariff hike
VIL already has FY21 annualised cash gap of ~| 6000 crore (based on Q1FY21 annualised EBITDA and external debt interest & capex needs). From FY23 onwards, it would have to resume spectrum payment outflows (currently on moratorium) of ~| 16000 crore and the AGR annuity of | 8391 crore. Even assuming | 4000 crore of cost rationalisation based savings, there would a cash gap of ~| 26500 crore, assuming subscriber base stays constant. A back of the envelope calculation suggests the required tariff hike to just bridge the annual cash gap would be staggering ~92% from current levels. (Exhibit 3). We expect VIL s payout ability (as well as going concern promise) to be a near impossible feat unless there is an immediate fund infusion (already scheduled a board meet for the same) and a tariff hike coupled with customer churn arrest. Interestingly, a substantial tariff hike, in our view, will be necessity to attract fund infusion from external investors.
Valuation & Outlook
On the positive side, the legal tangles seem be over. We expect the industry, as a whole, to utilise their management bandwidth to expand profitability and cash generation. Airtel, with comfortable leverage, superior customer quality and consistent KPI is our top pick. We maintain BUY on Airtel with an unchanged target price of | 700/share. We also maintain SELL on VIL with an unchanged target price of | 6/share, given the difficult path ahead to assure survival and lack of clarity on the same. We also downgrade Bharti Infratel to REDUCE (from HOLD earlier) with a target price of | 180/share. The key risk for Infratel is on tenancy growth concerns and possibly in worst case, Vodafone Idea s survival (as it is an anchor tenant).
ICICIdirect Research Fundamental view on Bandhan Bank: Our research analysts have a HOLD rating on the stock with a target price of Rs. 400 from a 12 months perspective.
Bandhan Bank reported a reasonable performance. Moratorium improved from 71% in April to 24% as of July 3, 2020 with micro finance portfolio down from 100% in April 2020 to 30%. Mortgage book witnessed marginal increase in moratorium at 15%; up 200 bps. MSME portfolio saw an improvement at ~18% of advances under moratorium (35% in April 2020) and NBFC-MFI revived to zero moratorium vs. ~59% in Q4FY20.
AUM growth decelerated to 17.7% YoY to | 74331 crore (| 71846 crore in Q4FY20). Healthy traction continued in micro finance segment (~62% of AUM) at 21.2% YoY to | 47478 crore while non-micro finance growth came lower at ~12% YoY. Disbursement saw a healthy revival across portfolio with micro finance seeing traction QoQ at | 2859 crore, though down 30% YoY. Customer addition remained slowest at ~2.13 lakh in Q1FY21, taking total customer base to 2.03 crore. Deposit accretion continued to remain healthy at 35% YoY to | 60610 crore with ~24 bps QoQ improvement in CASA ratio to 37.08%.
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ICICIdirect Research Fundamental view on Larsen & Toubro: Our research analysts have a HOLD rating on the stock with a target price of Rs. 1045 from a 12 to 15 months perspective.
L&T reported reasonable order inflows while execution challenges remains amid Covid-19, which could have some impact in the near term. Also, preservation of working capital to be closely monitored to provide comfort on the balance sheet front. We expect it to deliver standalone revenue CAGR of 1.2% and EBITDA CAGR of 4.3% over FY20-22E.