Idea Cellular Ltd. F2Q11: Below Expectations :: Morgan Stanley

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Idea Cellular Ltd.
F2Q11: Below Expectations
Due to Lower Minutes Growth
Quick Comment: Idea reported F1Q11 results with
revenue and EBITDA 3% below our expectations and
profits 10% below expectations largely due to lower
minutes growth. EBITDA margin declined 30bp QoQ, in
line with expectations, and now stands at 24%, down
320bp YoY. Overall revenue grew 23% YoY and was flat
QoQ; absolute EBITDA grew 9% YoY, however, down
1% QoQ. Tax almost doubled to 7.4% of PBT, leading to
lower-than-expected profits, which fell 18% YoY and
11% QoQ.
Key Positives: 1) Passive division revenue and
EBITDA grew 9% and 24% QoQ, respectively. Margin
enhanced 505bp to an impressive 42.1% 2) Capex
guidance was revised to Rs40bn compared to
Rs40-44bn suggested last quarter. The company spent
Rs4.8bn in F2Q11 and Rs8bn in F1H11, largely due to
security restrictions imposed by the government.
Key Negatives: 1) Operational parameters – Due to
seasonality effect, overall minutes on network grew only
3% vs. an average of 18% the last three quarters.
MOU/sub/month fell 5% to 394 minutes. ARPMs fell
3.4% to Rs0.42, but the rate of fall was the lowest in six
quarters. This led to an ARPU decline of 8% QoQ, the
greatest drop in four quarters and vs. our expectations of
a 2% decline to Rs167. 2) Wireless division – Existing
circles EBITDA declined 3% vs. our expectation of
stable EBITDA. Margin fell 60bp to 27%. Overall losses
from new circles increased from Rs1.40bn to
Rs1.43bn, after reducing the previous quarter. Wireless
EBITDA on the whole declined 4% and margin fell 86bp
to 20.7%
What does this do to our earnings? We expect
operational performance to improve in the next quarter
due to the festival season. We await further details from
management and maintain our Overweight rating and
estimates for the company.