Markets have a better Idea

"Buy, when promoters buy. For, they know their business best.” - This financial wisdom has been inherited over generations of investors. But, there are exceptions to all theories. And this investment theory also has contentions from time to time.

Take the case of Idea Cellular’s preferential allotment, of 32.66 crore shares worth Rs 3,250 crore, to promoter group companies. At Rs 99.50 per shares, the premium works out at Rs 89.50 on the face value of Rs 10 per share. The allotment took Aditya Birla Groups holding in Idea, the 3rd largest cellular service provider in India, from 42.4% to 47.2%.

This fund raise is first tranche, approved in a board meeting on Jan. 4, 2018, while the second tranche would entail Rs 3,500 crore capital raise through either a preferential allotment, qualified institutional placement, rights issue or a route which the board determines.

Announcing the completion of the preferential issue, Kumar Mangalam Birla, Chairman, Aditya Birla Group said, “This equity infusion reiterates the Group’s commitment towards the telecom business and confidence in its growth prospects." He further added, “With the planned fund raise combined with the recently announced sale of Idea’s towers and potential monetization of the Indus stake, the Company will be better capitalized to participate in the growth opportunities offered by the sector.”

A release announcing the infusion mentions that the total fund raise will reduce Idea’s net-debt and as a result Vodafone’s net-debt contribution to the merged entity will also be reduced by an equivalent amount. Additionally, the recently announced sale of Idea and Vodafone India’s standalone towers to American Tower Corporation for an aggregate enterprise value of Rs. 7,850 crore and the potential monetization of Idea’s 11.15% stake in Indus Towers, will further augment the long term capital resources of the company.

"These proceeds will significantly strengthen the balance sheet of the merged entity (Idea and Vodafone India) creating a resilient entity for the future," the release adds.

The exception to the ‘buy with promoters’ wisdom is seen in the way Idea Cellular’s share prices have moved in the last three months, especially since Jan. 5, 2018 – the day after the board approved the fund raise.

The allotment price of Rs 99.50 per share, the price that three Aditya Birla Group companies paid to acquire the 4.8% stake, worked out to be 4.81% discount to Idea’s closing price of Rs 104.53 on Jan. 4, 2018 – the day of board approval.

No doubt, the wisdom had its role played well on Jan 5, 2018 – the day after the board meeting – as Idea Cellular closed 10.72% higher at Rs 115.73 a share. But, the ground realities of telecom business have hit the share price hard enough.

In a Jan. 29, 2018 research note, Bhupendra Tiwary and Sameer Pardikar, analysts with ICICI Securities said that given the continued pricing pressure by (Reliance) Jio, the industry rebound still seems some time away. “While industry consolidation is largely over, pricing sanity remains to be seen as (Reliance) Jio continues to slash tariff to capture subscriber market share,” Tiwary and Pardikar wrote.

“We are also worried by the company’s (Idea’s) intent of not being aggressive on pricing and focussing on non-data 2G users, as it could be double edged sword resulting in sharp subscriber churn,” the duo added. With a hold rating on Idea Cellular, the duo had projected the share price target of Rs 85 over 12 months – a downside of 8% compared to then prevailing prices of Rs 92 a share.

And exception of the wisdom is clearly depicted by Idea Cellular’s share price of Feb.12, 2018. At Rs 84.70, the stock closed 1.01% higher on the BSE, but that makes the mark to market premium on the preferential allotment at a huge 14.8% for the promoter group companies given the allotment price of Rs 99.5 a share.