IDEA CELLULAR Pressure on realisations continues :: Edelweiss

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IDEA CELLULAR
Pressure on realisations continues





􀂃 Results below estimates; tariff decline steeper than expected
Idea Cellular (Idea) reported Q2 results lower than our forecast, as both RPM
and MoU declined more than expected. In a seasonally weak quarter, overall
minutes grew at a tepid 3% Q-o-Q, while MoU fell 5.1% Q-o-Q, to 394. Despite
stable headline tariffs, RPM slipped 3.4% Q-o-Q, to INR 0.424. Consolidated
revenues were flat Q-o-Q, despite 8% Q-o-Q subscriber growth, owing to RPM
and MoU decline. EBITDA margin declined in the established circles, and were
down 60bps Q-o-Q to 27%. However, overall margin declined only 30bps, to
24%, as losses in the new circles were relatively flat Q-o-Q, at INR 1.4 bn and
Indus margin improved 510bps to 42.2%. While the performance during the
quarter is not indicative of the actual business activity for the sector due to
seasonality, we were disappointed by the 3.4% Q-o-Q decline in RPM since
commentary from operators seemed to suggest that RPM stability was in the
offing. We reckon that RPM decline will continue even if headline tariffs remain
stable, owing to various promotional schemes by operators.
􀂃 3G launch by early Q4; capex guidance marginally lowered
Management indicated that it is in the process of rolling out its 3G network in the
11 circles where it won spectrum and is also in talks with other telecos for longterm
roaming arrangements in the other circles. 3G services are likely to be
launched by late December 2010/early January 2011. Management has guided
to overall FY11 capex of INR 40 bn (versus earlier guidance of INR 40-44 bn)
and has earmarked ~INR 30 bn for 3G rollout.
􀂃 Outlook and valuations: cautious; maintain ‘HOLD’
We continue to remain cautious on the sector as we think tariff wars will resurge
and launch of 3G services would dilute profitability. Idea has capitalized interest
of INR 1.2 bn in Q2 for funds raised for 3G license fee (in Q1FY11, it capitalized
~INR 404 mn). It intends to launch its 3G services late December-early January
and thereon the capitalized interest and license fee amortization will start getting
reflected in the P&L. Recent regulatory news flow like – (1) DoT’s proposal for
treating all circles as one service area, which would mean all NLD calls are
considered as ‘local calls’; and (2) DoT evaluating the requirement of sending
SIM cards to new subscribers to their communication address (instead of selling
over-the-counter) – could materially impact margins for telecos, if implemented.
We have revised our FY11-12 estimates upwards by 8.5%/8.1% owing to lower
net interest costs (our revenue/EBITDA estimates remain unchanged). At 7.2x
FY12E EV/EBITDA, we maintain ‘HOLD/Sector Performer’ on Idea.