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Action
We downgrade IDEA to REDUCE with a revised price target of INR65 due to:
1) disappointing 2Q results with no sequential revenue and EBITDA growth, and an
11% NPAT decline; 2) although price declines are abating, the company noted that
the newer operators have been over-active in acquisition offers, which is impacting
realized prices – this remains a further risk; 3) losses in its nine new circles have
not shown any recovery yet; and 4) current valuations are expensive given the
expected trends. M&A hope remains, but this needs further regulatory reforms.
Catalysts
Improving quarterly trends, diminishing losses from new circles, possible M&A, and
regulatory clarity on MNP and 3G are potential catalysts.
Anchor themes
The subscriber growth cycle is by no means over, but returns on incremental
subscribers are uncertain. 3G/data should offer further growth opportunities.
A blip or a dip?
Uncertainties ahead
We have commended IDEA’s consistent execution over time, but in
our view, the current valuation is riding more on M&A hope and is not
reflective of operational uncertainties we see ahead. The September
quarter is seasonally weak, but the numbers and trends were still
weaker than anticipated, despite a benign competitive environment.
Moreover, we do not see scope for positive operational surprises in
coming quarters — especially if newcomers like Uninor remain
aggressive, or the incumbents look to defend share ahead of the
3G launches. IDEA has not yet announced any formal 3G rollout
plans; this should occur in the next few months, as indicated by
the CEO today. Regulatory uncertainties lie ahead, and there are
some expectations for amendments to TRAI’s initial proposals. We
argue that the share prices for all listed telcos are not really
reflecting regulatory uncertainties.
Weak September-quarter results
Revenue of INR37bn was flat q-q, while EBITDA of INR8.8bn was
down 1% q-q, with 24% margins (vs 24.3% last quarter). The
September quarter is generally weaker for margins due to salary
hikes on 1 July each year. NPAT of INR1.8bn fell 11% q-q and
18% y-y. Loses from new circles have not improved from
INR1.4bn for three consecutive quarters now. MoUs fell to 394
minutes, off 5% q-q, and RPM fell to 42paisa, -3.4% q-q. The
company also refined its capex guidance to the lower end of its
previous INR40-44bn range.
Expensive valuation; downgrade to REDUCE
IDEA is trading at FY12F P/E of 25x and EV/EBITDA of 9x. This is a
>50% premium to domestic and regional peers. We recommend
switching into Bharti domestically or Axiata for indirect regional exposure.
Axiata is rated BUY. Bharti is rated NEUTRAL.
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