Idea Cellular Results disappoint, retain SELL :: Emkay

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Idea Cellular

Results disappoint, retain SELL

SELL

CMP: Rs72                                        Target Price: Rs60

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n     Q2FY11 PAT at Rs1.8bn (v/s our est. Rs22bn) and EBIDTA at Rs8.8bn (v/s our est. 9.2bn) misses our estimates due to absence of sequential revenue growth

n     ARPU falls by sharp 8.3% QoQ to Rs167 as MOUs drop by 5.1% to 394 minutes. Traffic growth muted at just 3% QoQ

n     Net debt reduces on lower capex in 1H due to lack of equipment imports. But 2H capex to compensate

n     Valuations expensive at 9.4x & 7.8x EV/EBIDTA for FY11E & FY12E respectively. Prefer Bharti Airtel available at 6.9x FY12E EV/EBIDTA. Retain SELL rating with target Rs60

Revenue growth absent, profits miss estimates

Idea Q2FY11 cons. PAT of Rs1.8bn was lower than our and consensus estimate of

Rs2bn. The revenues remained flat sequentially at Rs36.6bn due to sharp 8.3% fall in

ARPU. EBIDTA declined by 1% QoQ to Rs8.8bn v/s estimate of Rs9.2bn. EBIDTA

margins declined by 30bps QoQ due to higher employee costs. Cons. PAT declined by

10.8% QoQ to Rs1.8bn. Poor revenue show which is partially explained by a weak

quarter has been the key disappointment during the quarter.

ARPU falls by sharp 8.3% on 5% fall in MOU

Although the subscriber growth remained healthy at 8.7% QoQ, the ARPU fall of 8.3%

resulted in flat revenues sequentially. ARPU fall was due to 5.1% fall in MOU and 3.3%

decline in RPM to Re0.42/ minute. Overall traffic growth for the quarter was subdued at

just 3% QoQ v/s that of 18-20% witnessed during the last two quarters.

Established circles EBIDTA declines 3% QoQ

Idea’s revenues in established circles have decreased by 1% QoQ while the EBIDTA in

the same has witnessed 3% decline sequentially. The EBIDTA margins of the

established circles have reduced by 60bps QoQ to 27%. Moreover, despite 10% QoQ

revenue growth in new circles, the EBIDTA losses in new circles increased by 2%.

H2 to see high capex of Rs32bn

While Idea has kept its FY11E capex guidance at Rs40bn, it has spent just Rs8bn in H1

due to issues pertaining to equipment imports. Hence Idea would witness capex of

~Rs32bn in H2 which would increase its net-debt from current level of Rs93bn as it

generates ~Rs7bn of cash profits every quarter. We estimate Idea’s net-debt to increase

from Rs93bn in Q2FY11 to Rs115bn by Q4FY11, which implies net-debt/ EBIDTA of

3.1x for FY11E.

Valuations 7.8x FY12E EV/EBIDTA expensive v/s Bharti – Retain SELL

Although we maintain our FY11E estimates factoring recovery in subsequent quarters,

we await consensus downgrades to follow. At CMP of Rs72, Idea trades at 9.4x and

7.8x EV/EBIDTA and 30.7x and 26.9x estimated EPS of Rs2.3 and Rs2.7 for FY11E

and FY12E respectively. We maintain SELL rating on the stock with target price of

Rs60, on expensive valuations and relatively higher balance sheet risks. We like Bharti

Airtel as preferred play in India telecom sector given superior return profile and cheaper

valuations of 6.9x EV/EBIDTA FY12E.