IDEA Cellular Ltd OUTPERFORM- Price target: Rs81 :: Standard Chartered

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IDEA Cellular Ltd
OUTPERFORM (unchanged) Price target: Rs81



Summary
Idea’s 2Q FY11 was slightly below our estimate at the EBITDA level as minutes growth came in lower than
expected. Net profit, however, was supported by the capitalisation of 3G related finance costs. A strong
performance from Indus was the only positive takeaway. We believe the worst of the rev/min decline is behind and
a likely bounce back in traffic growth could improve its financial performance in 2H. Reiterate Outperform


Results: key points
Traffic growth lower than the “lowered” expectations – 2Q FY11 revenue was flat
sequentially as minutes growth of 3% qoq was below expectations. Though a seasonal slowdown
was to be expected, growth was at the lower end of the range, in our view. This coupled with
higher staff costs resulted in a 80bps decline in EBITDA margin; EBITDA of Rs7,618m was thus
3% below expectations. Reported PAT was, however, higher than expectations due to
capitalisation of 3G financing cost of Rs1.2bn during the quarter.
1H EBITDA at 45% of FY11 estimates – We believe that the key to Idea achieving full-year
forecasts is (i) relative revenue stability in 2H and (ii) seasonal bounce back in traffic growth.
However, if the disappointment in minute growth in 2Q was due to market share loss, then it
could expose our forecasts to some downside risks.
Indus reported material improvement – Indus (contribution to Idea) reported revenue growth of
8.7% qoq and EBITDA growth of 24% qoq. This is encouraging especially if it’s driven by higher
tenancy/3G. We await further details.


Capex run rate on the lower side – Idea’s capex in 1H was Rs8.0bn against guidance of
Rs40bn. Though there could be some catch-up/3G capex in 2H, Idea’s careful rollout strategy in
new circles may result in lower capex vs. the new guidance. This could marginally improve the
B/S (current Net Debt/EBITDA > 3x).

Valuation: Fair value of Rs81 – This comprises March 2011 DCF of standalone Idea at
Rs69/share and value of Indus at Rs12/share. The DCF imputes EV/EBITDA of 8.0x FY12E, at
par to Bharti. On P/CEPS, however, Idea’s DCF imputes 7.7x FY11E, ~ 20% discount to Bharti.