Good day, ladies and gentlemen. Thank you for standing by, welcome to the Axiata Group's conference call. Throughout the presentation, all participants are in listen only mode. There will be a presentation followed by a question and answer session. Firstly, two housekeeping reminders. Please mute your phone during the presentation kindly avoid using wireless headsets. This call is recorded. Today, 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 for organizing this call in such a short notice. Before I get into details, you know we have this blackout period at the moment because we will be announcing our quarter two numbers on 23rd August. I will not be able to address any question other than specific announcement which we made on Friday, which is relating to the impact to Axiata on Vodafone Idea merger. Let me just quickly update, I am 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, 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 of administrative requirement in the sense it basically validates all the approvals which were required, had they been received. The company will have to file the registrar company, to complete the merger. Merger could happen anytime. Completion could happen before we announce the quarter two results or could happen afterwards. That's the reason why we have given a significant range of impact, because ultimate impact will come only once the merger gets completed. It's fair to assume, whether that part of the impact comes in quarter two or in quarter three, the full impact would be considered as and when the merger gets completed. I'll quickly run through the presentation deck which we circulated.
Little focused around the performance of Idea and how the market situation has impacted us, but more so, impact what's going to happen to Axiata post the merger gets completed. Let me just start with the slide number two. Slide number two, as you can see, I think Idea has been one of the better performers in India telecom space. They had a revenue growth of around 20% a PAT growth or CAGR of 18%. I think also the good part is, in the first nine years of our relationship or investments, we did get around MYR 1 billion profits coming from Idea. However, if I go to the next slide, you know what's happened after Reliance Jio's entry in 2016. That has consequently resulted in a sharp fall in ARPU as well as impact on margin.
Idea has not been the only one which has been impacted. The entire industry has been impacted because of the tariff reduction which Reliance Jio brought in the market. 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 MYR 450 million losses. In first quarter, we had a MYR 114 million loss, plus another impact around MYR 370 odd million on account of the dilution in our holding in Idea. It has had last, the market has been very intense, with price tariffs coming down has had a negative impact on the performance of Axiata.
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 a lot of smaller players either exiting or merging with the larger operators. Vodafone Idea put together would be one of the largest operator once the merger gets completed. But consequent to this, the impact has been significant write-offs for some of the other operators, whether 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, consequent to the market structure, which has been redefined after Jio's entry. From our perspective, if I go to slide number five, we have always been supportive of this merger.
The reason we have been supportive of this merger is that the long-term value creation from the two companies coming together and consolidation in the market has always been helpful. Even our strategy has been essentially driving consolidation in the market. It just is not sustainable for multi-players to be existing in the market. I think from that perspective, we have been always positive about this merger. It does bring in a company which has got nearly 440 million subscribers with MYR 10 billion plus revenue, and to start with around nearly 38% revenue market share. I think from the perspective of merger would be significant synergies, which is what the market has been communicating by the two companies, which is equivalent to around nearly MYR 2 billion actual saving on an annual basis, coming largely out of network synergies but also out of other elements.
I think, given that this would leave three to four operators, we do see a long-term future value of our investment in Idea to remain strong. If I go to the next one, I think that is the more important slide where we wanted to explain the impact for us in our financial numbers consequent to this merger. First of all, it is a non-cash, one-off accounting adjustment. 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 are still committed to stay on course to come back to those dividend payout ratios. Also, it does not anywhere reflect the future value of Idea, our investment, and also the future value of Axiata.
The range when we say MYR 1.5-3 is, if I can just clarify, is on account of timing of completion of the merger. If it happens before the quarter two 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 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 three. I think that's the reason why we have given a range of MYR 1.5-3, more from the impact to the quarter two number.
The final impact would be based on what is the price of a share of Idea as on the date of completion of the merger. Consequent of the merger completion, we will be diluted to half of our current investment, which would be 8.17%. Because of that, we lose some of the rights we have as part of the shareholder agreement. Those rights are related to anti-dilution as well as holding a board seat. Consequent to that, we will be reclassifying the investment as a simple investment and not an associate, i.e., we would be not accounting on the equity basis. As I said earlier, this is a non-cash, one-off adjustment and does not have any value impact on Idea.
In fact, we believe clearly the future value of Idea, 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. Just to clarify, PATAMI, we will recognize the impact in quarter two financial results. Post that, we will stop accounting for the investment as an equity, which means we will stop absorbing profits or losses coming from the actual operations of the company. As you know, for the last one and a half years, we've been actually absorbing losses. That's, I think, in a way, from a normalized PATAMI perspective when 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 payouts, which we had 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. Our cash position with MYR 5.7 billion last quarter, again, is fairly strong. In that sense, it does not have any major significant bearing on our financial position and also the cash position. I think the question which sometimes I've heard investors and analysts asking, once you have reclassified the investment, what would you do with it and when do 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 three pillars. We also have a very clear investor proposition, which is of moderate growth and moderate dividend. 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 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. There's no timing as such in our mind, but it is all depend on the purpose and the returns which we can get much higher in an alternate investment.
As I said earlier, our cash position is fairly strong. We've got a fairly decent balance sheet. Our headroom on borrowings also fairly okay. We don't see any immediate need, but it will all depend on how we are going to look at this investment from an overall portfolio standpoint. I think in summary, we believe that 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, it's non-cash, one-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. It is in no way reflective of our Axiata's future value or, as you say, Idea's future value. Apart from that, basically, we will look at it from our portfolio optimization standpoint, focus around the three pillars with the moderate end growth and moderate dividend proposition to our investors. We will look at it from an optimum portfolio strategy standpoint and looking at it to ensure that we 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 opens to Q&A.
Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. Your first question comes from Wei Shi Wu from BNP Paribas. Please go ahead.
Hi. Thank you very much for the presentation. Firstly, now that 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? Secondly, I note your comment that you will be looking to add opportunities to exit this investment completely, depending on opportunities, et cetera. What are some of the options or potential buyers out there in the market that you can potentially identify, and where will the cash proceeds be reinvested into? Thirdly, can you give some comments as to how far Axiata is away from its optimum portfolio or capital allocation post this dilution? Thank you.
I think let me start with the first question. The first question under the accounting standard IFRS 9 allows us to classify investment as a part of balance sheet or P&L. The first time, which is once we classify as simple investment, given that we are not into the business of trading our portfolio on a regular basis, this would be classified in the balance sheet as where the mark-to-market impact goes through the OCI route. It does not go through the P&L. We would do mark-to-market, but it will not have any P&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.
The intent here is, 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. I think that, 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. 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 three pillars. The options as and when we sell, exist, 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, opportunities which would give us a much better return than continuing as a financial investment in Idea. There's nothing planned as such at this point in time. There's no potential buyer which has been identified. We do not have a very clear, at this point in time, target on where we will invest this cash if we have to exit. 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 an 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. Clearly, when we look at our portfolio, we look at portfolio in markets where we would expand. There are portfolio where we would expand, there would be portfolio where we look at monetization, and there would be portfolios where we look at exiting. That process continues, but where we expand and invest more is always linked to our strategic directives 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?
I think we've said always that as part of our strategy, expand 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 tower business which has been looking at portfolios outside our core markets but very much within the region.
Thank you very much.
Your next question comes from Arthur Pineda from Citigroup. Please ask your question.
Sorry, I had exactly the same questions a while ago. I'll pass. Thank you.
Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from Alex Goh, AmBank. Please go ahead.
Thank you for the opportunity. I just want to follow up on a question on the plans. I know you have no plans to exit, I need to know whether there is any lock-in period after the merger. Let's say if the merger were to be completed today, can you sell it tomorrow? Is there any cooling off period? My second question is after the merger, you have managed to generate the synergies up to the fourth merger year, do you think the merged entity is able to break even on, say, even on a EBITDA level? 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? Thank you.
The first, I think there is no lock-in as such post the merger if we have to sell. There's no cooling period as such. Second question, I think at a break even, both of them are positive on EBITDA, so it's not that they have negative EBITDA, so they may have negative profits. I think synergies, as they've said, which would potentially be anywhere around MYR 10 billion on a NPV basis, those synergies should allow them. Also the scale should bring them a much higher EBITDA margins. I think the consolidation in the market is also expected to drive that improvement in EBITDA margin. Given how the market structure has been changing every day, it's very difficult to say whether that would happen or when would that happen. I think we'll have to watch that.
Given where it is at this point in time, this is probably the best solution for the two 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% of the dividend payout ratio, which is a percentage of the normalized earnings. You are right, we do declare dividend payout ratio, which is as a percentage of our normalized earning.
Okay. Just a follow-up, man. Do you have numbers for Vodafone's losses for the first quarter of this year?
They haven't declared separately the losses from India in their disclosures, because we believe they had already deconsolidated this entity. We haven't seen their actual losses for 2017.
Okay. All right. Thank you so much.
Your next question comes from Srinivas Rao, Deutsche Bank. Please ask your question.
Hi. This is Srini here. Just wanted to clarify a couple of things. You said once the merger happens, then you will lose the board seat. Does that happen on the day of the merger, is approved by the DOT, or how does the process work? Secondly, with the anti-dilution rights, I presume, in the last round where you did not invest, effectively you forego that right. Am I correct in my interpretation of that? Does it mean that basically your current shareholding post-merger will be unencumbered to be sold at any point of time? Finally, Yeah, go ahead.
Srini, you complete your question, then I can answer.
Yeah. My last question was that, does the Idea group still have the right of first refusal on your shares post the merger, or that's also gone? Thanks.
I think the first question was that, as per the shareholder agreement, we had the two specific rights, which was board 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. The day the merger gets completed, and our understanding is completion will be when they file to the registrar of companies after they've got the NCLT approval, or if there are any other CPs which are pending between the two parties. Once they've done that and filed with the registrar, that's when the merger would be completed. We automatically, on that very moment, lose our rights. Second question, can you repeat, Srini, what was the second question?
I also understand there was a first right of refusal between the Birla promoter group and yourself on the stakes. Does that still remain valid post the merger? That i.e., does the Birla still have the right to buy your stake?
No, that's not valid.
Okay.
We can sell it.
Understood. Okay. Thanks.
Ladies and gentlemen, as a final reminder, please press star one to ask a question. There are no further questions at this time. We will now pass the call back to Vivek. Please continue, sir.
Okay. I hope this clarified the current stages and how we look at the impact of this merger to Axiata. I would just reiterate that at this point in time, I think there was a lot of ambiguity around when would this merger get completed. Now that it is fairly close to completion, in our view, it's good that uncertainty or ambiguity is going. We do see a better future value of investments post the merger, given the market structure and the scale and size of this company. I think that's it. Thank you very much for joining us on this call. 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.