@Jiitt007 My thesis was purely fundamental when the EV was around 95k Cr or so (Around Rs.4/share levels). If someone was willing to buy the entire company, they get an EBITDA about 1/6th what they put in, in the first year. The reason why no one would do it is of course the AGR liabilities, regulatory risk, currency risk and poor laws (if the money comes from abroad that is). All these still remain and even the parent had very recently pretty much written off their equity in the company. So the main question was, can the company survive? If it does what will I make and if it doesn’t, what do I lose?
All this has to be seen from a game theory standpoint - It has been one bad news after another to Airtel and Idea in the last few years as they lost market share, battled with the AGR dues and struggled with servicing debt. In this situation, the parent doesn’t want to send good money after bad and that’s perfectly understandable. See this from the perspective of the govt. - Can they allow Voda to sink and make it a 2 player market? They clearly can’t and that’s why they agreed for deferred payments but SC put in a spanner in the works. At the same time, the price-war in the sector is over. Now none of the players are ready to play the price-war game and they are increasing prices like a cartel and it shows in the ARPU.
This considerably improves the odds of a survival as money coming in, has less headaches to deal with and that’s what is currently being priced in (before today’s rally). Now if the SC decision goes in favour, cash flows in the next few years will improve considerably, and then from surviving, it will be a matter of thriving. I bought because the risk of ruin was minimal (mostly in the price) and was curious to see if the thesis played out. I feel there are lot of things which can possibly work out and as the market sees this news incrementally, slowly EV will keep increasing along with the other two players. Here though a 10% increase in EV will double the Market cap (at least at the time of my initial thesis), so the risk:reward was tremendously favorable. We must also consider the cost of capital elsewhere in the world. Large tech companies have large capital without any avenues to invest and interest rates are negative or zero in most economies as a consequence. Odds of someone taking a bite in an opportunity like this is somewhat high.
These things don’t always work out and they especially will not work out if the regulatory risk is too high (as in this case) and the interest coverage ratio is abysmal. Here interest coverage ratio is improving and sector dynamics is getting buyoant and any incremental topline, flows directly to operating earnings (Interest monster still stays ahead of the bottomline) which makes the odds of survival relatively higher. Even now things can go down south if SC is adamant and is intent on killing the business (for what joy though?), but the valuation gulf between which way that decision goes is too wide and it will slowly get priced in, along with the sector dynamics.
As for the technicals, there is one which I see as price-war trendline and another which I see as solvency trendline. The one which it has broken today is what I consider the solvency trendline. If you follow shifts between these and the news that has come out in the past, you will see why that is. Sorry for the long-winded answer.