Idea Cellular Weak 2Q results led by lower minutes-growth, higher costs :: Anand Rathi

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Idea Cellular
Weak 2Q results led by lower minutes-growth, higher costs
 2QFY11 below expectations. Consolidated Revenue, EBITDA and
PAT came in 2%, 6% and 20% below our estimates, respectively. Higher
EBITDA from Indus was more than offset by weak wireless EBITDA
(8.3% below est.) driven by lower minutes and higher employee costs.
 Volume seasonality more pronounced. Revenues were flat qoq (vs.
our +2% est.), as the 3% minutes-growth (+4.5% est.) was completely
offset by 3% ARPM drop (-2.4%). Rural wireless business tends to
shrink in 2Q, and with its ever-increasing share (49% of Idea subs in
1QFY11 vs. 43% in 1QFY10), as well as extended monsoon rains this
time around, the seasonal weakness was clearly more pronounced.
 2Q may well represent the margin-bottom. Wireless EBITDA margin
(ex Indus) was down 86bps qoq to 20.7%, driven by 120bps increase in
employee cost-to-sales ratio; salary increments and incentive pay (from
July-10) were higher this time around. In the nine new circles, despite
strong revenue growth (10.5% qoq), the EBITDA loss did not come
down, due to higher trade promotions and employee costs. Nonetheless,
margins are likely to improve from 3Q, driven by seasonal up tick in
volumes, moderating ARPM drop and higher operating leverage.
 Capex and gearing. 2Q capex (excl. 3G spectrum fee, Indus) was only
`4.8bn. 1H capex (`8.0bn) is just 20% of mgmt’s `40bn guidance for
FY11. Mgmt expects a significant surge in capex from 3Q, due to easing
of import restrictions and ongoing 3G deployment. Net debt (ex Indus)
was `92.5bn (~3x annualized 2Q EBITDA); we expect the net debt to
grow rapidly in 2H, as Idea turns FCF negative due to increase in capex.
 Bharti’s domestic wireless biz may outperform slightly. Given a
lower rural market exposure (39% of subs), and a more mature business
(no start up circles), Bharti may produce better 2Q Revenue/EBITDA
trends than Idea, in our view. For Idea, while we expect some reduction
in our earnings forecasts, we maintain our positive view and remain
buyers on dips.