Investor Update

Jul 30, 2018

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Axiata Group's conference call. Throughout the presentation, all participants are in a listen only mode. Firstly, 2 housekeeping reminders, please mute your phone during the presentation and kindly avoid using wireless headset. This call is recorded. To Vivek Sood, Group CFO will lead the conference call. I would now like to hand the conference over to your speaker today, Mr. Vivek Sood. Thank you, sir, Please go ahead. Very good afternoon. Apologies from organizing this call in such a short notice. Before I get into details, you know, we have this black hole treated as a moment, because we will be announcing our quarter two numbers on 23rd August. So I will not be able to address any question other than announcement, which we made in, on Friday, which is leading to the impact to Exjeda on Vodafone idea merger. Let me just quickly update and I'm sure most of you would be aware, the update on status of the merger. We are aware that the final approval from DOT has been received and the idea did communicate that on Friday. Since it's got a significant impact on our financials, we also made the similar announcement here. Giving a range of what could be the financial impact to us. As far as we understand the status is now the final approval is pending from NclT, which is more a administrative requirement in the sense it's It basically validates all the approvals, which were required, have they been received. And then the company will have to do a file with strong company to complete the merger. A merger could happen anytime completion could happen before we announced the quarter 2 results or could happen afterwards. And that's the reason why we have given significant range of impact, because ultimate impact will come only once the merger gets completed. So it's fair to assume whether that part of the impact comes in quarter 2 or in quarter 3, the full impact would be considered as in when the merger gets completed. So I'll quickly run through the presentation deck which we circulated a lot little focused around the performance of Eylea and how the market situation has impacted us. But more so impact was going to happen to IXIATA post the merger gets completed. So let me just start with the slide number 2. Slide number 2, as you can see, I think the idea has been one of the better performers in the in India Telecom space. They had a revenue growth of around 20% and a PAT growth or CAGR of 18%. And I think also the good part is in the 1st 9 years of their our relationship or investments, we did get around a 1,000,000,000 ringgit profits coming from idea. However, if I go to the next slide, you know what's happened after Lance Deo's entry in 2016. And that has consequently resulted in a sharp fall in ARPU as well as impact on non So idea has not been the only one which has been impacted. The entire industry has been impacted because of the tariffs reduction, which Reliance Geo brought in the market. So that has had an impact on idea as well as the entire industry. And that has had a negative impact on us. Last year 2017, we were impacted by around 450,000,000 losses. And in first quarter, we had a 114,000,000 ringgit loss, plus another impact around $370 odd 1,000,000 on account of the dilution in our holding in IDM. So it's hard last, well, the market has been very intense with price tariffs coming down. Has had a negative impact on the performance of IXIATA. If I go to the next slide, I think the good news in our view has been that the market is getting quite consolidated now. With lot of smaller plays, either exiting or merging with the larger operators. And Vodafone idea put together would be, would be one of the largest operator once the merger get completed. But consequent to this the impact has been significant write offs for some of the other operators with the foreign players or even the domestic operators in India. So far, the impact to us has been relatively lower than what the others have been impacted consequence to the market structure, which has been redefined after geosentry. So from our perspective, if I go to slide number 5, we've always been supportive of this merger. And the reason we've been supportive of this merger is that the long term value creation of from the two companies coming together and consolidation in the market has always been helpful. And even our strategy has been essentially driving consolidation in the market, it just doesn't is not sustainable for multi players to the existing in the market. So I think from that perspective, we've been always positive about this merger. It does bring in a company which has got a nearly 4,000,000 and 40,000,000 subscribers with 10,000,000,000 plus revenue and to start with around nearly 38 percent revenue market share. And I think from the perspective, of merger would be significant synergies, which is what the market has been communicated by the 2 companies, which is equivalent to around nearly $2,000,000,000 actual saving on an annual basis coming out of largely out of network synergies, but also out of other elements. And I think given that this would lead 3 to 4 operators, we do see a long term future value of our investment and idea to remain strong. If I go to the next one, I think that's the more important slide, where we wanted to explain the impact for us in our financial numbers, consequently, this merger. First of all, it is a non cash 1 off accounting adjustment. So it does not have any bearing on our underlying performance. We still are committed to the dividend, which we had said earlier that we will be back to 2015 levels as of now, we're still committed to stay on course to come back to those dividend payout ratios. And also, it does not anyway reflect the future value of idea of our investment and also, the future value of AGRDA The range when we say 1.5 to 3 is if I can just clarify is on account of timing of completion of the merger. If it happens, before the quarterly numbers are announced, then we would take the entire impact. If it does not, then there is a possibility that we will have to take half the impact now, which is consequent to the reclassification of investment, half of investment because we get diluted to 50% as held for sale. And the balance will come at a point in time when the merger gets completed. That may flow into quarter 3. I think that's the reason why we have given a range of 1.5 to 3, more from the impact to the quarter 2 number. But the final impact would be based on what is the price of share of idea as on the date of completion of the merger. Consequent to the merger completion, we will be diluted to half of our current investment, which would be 8.17. And because of that, we lose some of the rights we have as part of the shareholder agreement. And those rights are related to anti dilution as well as holding a boat seat. Consequent to that, we will be reclassifying the investment as associate as a simple investment and not an associate I. E, we would be accounting not accounting on the equity basis. As I said earlier, this is a non cash one off adjustments and does not have any value impact on ID. In fact, We believe clearly the value, future value of Ida given the consolidation in the market and the scale and size and the benefit of synergy should be much higher than what it is at this point in time. So just to clarify, Patami, we will recognize the impact in quarter 2 financial results. And post that we will stop accounting for the investment as an equity which means we will stop absorbing profits or losses coming from these, the actual operations of the company. And as you know, for the last one and a half years, we've been actually absorbing losses. So that's, I think, in a way, from a normalized performing perspective and we report, that's an upside because of the elimination of this loss. As I said earlier, we will continue to remain committed to the payout, which we have said earlier that we will come back to 2015 level. This will have no impact on our cash flows. Our balance sheet continues to be strong. And our cash position with 5,700,000,000 last quarter, again, is fairly strong. So in that sense, it does not have any major significant bearing on our financial position. And also the cash position. So I think the question which sometimes I've heard in which is an analyst asking, what are you going to do with the once you have reclassified the investment what would you do with it and when you plan to monetize it? I think our focus first of all, starting point is that after this dilution, it is no longer a strategic investment for us. It would be seen from our perspective more as a financial investment. We will continue to focus on our core strategy, which is into these 3 pillars and we also have a very clear investor proposition, which is of moderate growth and moderate dividend. But I think most important when we look at our portfolio, we always keep optimizing our portfolio. Given that this is no longer a strategic investment, we will look at how and what is the right time for, for if we have to exit from this and that would be largely dependent on our process of optimizing our portfolio and looking at right opportunities to be able to invest in our strategic pillars where we see future value to be created. So there's no timing as such in our mind, but it will all depend on the purpose and the returns which we can get much higher in an alternate investment and as I said earlier, Our cash position is fairly strong. We've got a fairly decent balance sheet. Our headroom on on borrowings also fairly okay. So I we don't see any immediate need, but it'll all depend on how we are going to look at this investment from an overall portfolio standpoint. So I think in summary, we believe that this investment does this merger does allow for a long term value creation with consolidation happening in the market with strong opportunity of synergies, being achieved between the two companies and scale and size which the company will be able to achieve. On financial impact, as I said earlier, there's really no It's non cash 1 off accounting adjustment. Does not have any bearing on our underlying performance. Our balance sheet remains strong. We are committed to going back on our dividend payout ratios. And it is in Norway reflective of our or Exela's future value or as you say ideas future value. Then apart from that, basically, we will look at it from our portfolio optimization standpoint, focus around the 3 pillars with the moderate and growth and moderate dividend proposition to our investors. We will look at it from a strategy, optimum portfolio strategy standpoint and looking at it to ensure that we have continue to have a strong cash flow and healthy balance sheet to support our strategic investments. I think that's what I had to say briefly on the slides which we went through. I think now open Your first question comes from Weixin Woo from BNP Paribas. Please go ahead. Hi. Thank you very much for the presentation. Firstly, now that the idea will be classified as a financial investment, can we expect that there would be mark to market adjustments every quarter depending on where the share price of idea will be going forward. And then secondly, I note your comments that you will be looking to add opportunities exit this investment completely depending on opportunities, etcetera. What are some of the options or potential buyers out there in the market, that you can potentially identify? And where will be cash proceeds be reinvested into? And then, thirdly, you give some comments as to how far Exietta is away from its optimum portfolio capital allocation post this dilution? Thank you. Yes. So I think let me start with the first question. The first question under the accounting standard, the IFRS 9 allows us to classify investment as part of balance sheet or P and L. The first time, which is once we classify as simple investments, given that we are not into the business of trading our portfolio on a regular basis, this would classified under the in the balance sheet as where the mark to market impact goes through the OCI route. It does not go through the P and L. So we would do mark to market, but it will not have any P and L impact. Only at a point in time when we sell that we will have a cash coming in based on what is the price of the share at that point in time. So the intent here is not to have, because we are not in a business of trading with our investments, intent is not to have variability in profits because of the mark to market impact going forward. So I think that it if I'm clear, is the answer for the first question. As far as the second one is concerned, I think, as I said earlier, We have a fairly good balance sheet. We have a strong cash position. There would be portfolio optimization is a regular process. It's not that we do once in a while, but we do that on a regular basis. And we have a very clear strategy on 3 pillars. So the options when as and when we sell exit is something which is not, at the moment, concretely decided because as I said, we are fairly strong position when it comes to the balance sheet. This would be dependent on opportunities which come. Our way, which put opportunities, which could give us a much better return than continuing as a financial investment in idea. So there's nothing planned as such at this point in time, there's no potential buyer, which has been identified. And we do not have a very clear point and then target on where we will invest this cash if we have to exit. But I think fair to say, as I said earlier, we believe after the merger, future value of idea should be better than what it is at this point in time. To summarize, I think we don't have any, as such, exit plans at this point in time. What I said was that since it's no longer a strategic investment, it's more like a financial investment, we will look at it on an ongoing basis as we optimize our portfolio. I think from a optimum portfolio, capital allocation perspective, as I said, this is something which is an ongoing process for us. It's not that we do one activity. So clearly, when we look at our portfolio, we look at portfolio on in markets where we would expand our portfolio where we would expand. There would be portfolio where we look at monetization and there would be portfolios where you look at exiting. So that process continues. But where we expand and invest more, is always linked to our strategic directors or strategic pillars as we define, as part of our strategy. Thank you. Can you just remind us where you would be looking potentially to expand or deepen your presence? So, I think we've said always that as part of our strategy expand is, is not necessarily into new markets. When we say expand, our primary focus has always been consolidation, in our existing market. Apart from that, we have our Tahoe business, which has been looking at portfolios outside our core markets but very much within the region. Your next question comes from Arthur Puneja from Citigroup. Please ask your question. Sorry, I had exactly the same questions a while ago. So I'll pass. Thank you. Your next question comes from I just want to follow-up on the question on the plans I know you have no plans to exit, but I need to know whether there is any lock in period after the merger, you know, let's say the is the budget wanted to be completed today? Can you sell it tomorrow, right? Is there any, dividend by, you know, cooling off period? My second question is after the merger and you have managed to generate the synergies up to the 4th merger year. Do you think the merchant entity is able to breakeven on, say, even on the EBITDA level? And my third question, your dividend payout policy, I just want to be sure is it going to be based on a 75% on a normalized earnings? Yes. So the first, I think there is no lock in as such, post the merger, if we have to sell. There's nothing there's no pulling period as such. 2nd question, I think, at a breakeven, I mean, both of them are positive on EBITDA. So it's not that they have negative EBITDA, it would, they may have negative profits. But I think, synergies, as they've said, which would potentially be anywhere around 10,000,000,000 on an NPV basis. The cost synergies should allow them to get and also the scale should have bring them a much higher EBITDA margins. And I think the consolidation in the market is is also expected to drive that improvement in EBITDA margin. But given how the how the market structure has been changing every day. It's very difficult to say whether that could happen or when would that happen? So I think you'll have to watch that, but given where it is at this point in time, this is probably the best solution for the 2 companies to come in and get the benefit of scale as well as the synergy. Dividend payout, we don't have a percentage as such. What we said was that in 2017, we said we would have around 50% the dividend payout ratio, which is a percentage of the normalized earnings. So you're right. We do declare dividend payout ratio, which is, as opposed to the drop off normalized earnings. Okay. Just to follow-up, could you do you have numbers for Vodafone Vodafone's losses in the first for the first quarter of this year? They haven't declared separately the losses from, from India, in their disclosures because we believe they had already deconsolidated this entity from the, so we haven't seen the actual losses put 17. Okay. All right. Thank you so much. Your next question comes from Srini Rao Deutsche Bank. Please ask your question. Hi. Dushini here. Just wanted to clarify a couple of things. You said one the merger happens, then you will lose the board seat. So does that happen on the on the day of the merger? Is approved by the DOT or how does the process work? And secondly, with the anti dilution rights, I mean, I presume, you know, in the last summer, you did not invest, you effectively, you know, kind of you forgo the crisis. Am I correct in my interpreter on that? Or does it mean that basically your current shareholding post merger will be unencumbered to be sold at any point of time? And, finally, one question. Yeah. Go ahead. Go ahead. No, no, you complete training, you complete your questions and I can ask you. Yeah. So my last last question was that, is there is there the idea group still have the offer the right of first refusal on your share sale on your shares post the merger or or that's all for that. Thanks. So I think the first question was that as per the shareholder agreement, we had the 2 specific rights, which was both seat as well as the anti dilution, till the time we remain above 10%. Consequent to the merger completion, our shareholding will fall below 10%. So we automatically lose those rights. So, so the day the merger gets completed and that our understanding is completion would be when they filed the the registrar of companies after they've got the NCMP approval or if there are any other CPs which are pending between the two parties for they've done that and file with the registrar, that's when the completion would be merger would be completed. So we automatically on that wait moment, lose over, right? Second question, can you repeat Srini? What was the second question? You know, I I also, understand there was a first set of refusal between the the Bridala promoter group and yourself on the stake. So is that does that still remain valid post the merger? Because IE, does the villa still have the right to buy your state? No, no, that's not valid. Okay, thanks. Ladies and gentlemen, at the There are no further questions at this time. Okay. I hope this clarified the current status and how we look at the impact of the mojo to a theater. So I would just reiterate that at this point in time, I think there was a lot of ambiguity around when would this merger get come treated. Now that it is fairly close to completion, I, in our view, it's good that that uncertainty of ambiguity is going. And we do see a continuing better future value of investment post the merger given the market structure and the scale and size of this company. So I think that's it. Thank you very much for joining us in this call. And if you have any further questions, we'll be free to answer. Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.