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Idea Cellular Ltd
Q2FY11: Weak performance yet ARPM decline moderating
Revenue flat, margins down: Idea Cellular (Idea) reported revenues of Rs 36.8bn,
flat QoQ and below our expectations led by slower momentum in traffic growth
(up 3% QoQ). The absolute consolidated EBITDA (Rs 8.8bn in Q2FY11) was flat
QoQ vs. our expectations of Rs9.4bn. Reported standalone margins came in at
20.7%, down ~80bps QoQ on account of higher wages. The consolidated
EBITDA margin was at 24% (24.3% in Q1FY11), helped by a better performance
of Indus (Indus EBITDA at Rs1,170mn , grew 24% QoQ). Net Income at Rs1.8bn
was below our expectations, down 18% QoQ. Capitalisation of 3G interest costs
was at Rs 1.2bn, in line with our expectations.
ARPM decline moderates, traffic growth subdued: MOUs were at 394 minutes,
down 5% QoQ and traffic growth was soft (up 3% QoQ) in a seasonally weak
quarter. Pressure on ARPMs (Rs 0.42) continues to moderate—down 3% QoQ
versus 5.4%/9%/8% QoQ declines seen in Q1FY11/Q4FY10/Q3FY10. ARPUs
(Rs 167) declined 8% QoQ due to higher than anticpated MOU decline. New
circles continue to do well with revenue at Rs 3.3bn (up 11% QoQ) and EBITDA
losses flat QoQ at Rs 1.4bn.
2G capex higher, FY11 capex guidance trimmed at the upper end: 2G capex
picked up marginally this quarter to Rs 4.8bn (13% of sales). The management
trimmed its capex guidance for the year to Rs 40bn (Rs 40bn–44bn earlier). Post
3G, the net debt stands at Rs 107bn (Rs 110bn earlier) implying a TTM Net
Debt/EBITDA of 3x; cash for the quarter stood at Rs 5.2bn.
Takeaways: Overall, this was a soft performance from Idea as moderation in
traffic growth due to seasonality was higher than expected. However, we expect
minutes growth to bounce back in the Dec-10 quarter and competitive pressures
should continue to ease. Further, growth in new circles remains strong and we
expect margins to improve as new circle losses begin to moderate. Additionally,
the improving performance and profitability of Indus is a positive. The stock is
trading at 9x/6.4x FY11E/FY12E EBITDA and we continue to maintain our
positive view on the sector and on Idea.
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