IDEA Cut estimates; fundamentals challenging REDUCE. :: Kotak Sec

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IDEA (IDEA)
Telecom
Cut estimates; fundamentals challenging, valuations rich. REDUCE. We cut our
revenue and EBITDA estimates for FY2011-13E by 2-4% and 6-7%, respectively. High
operating and financial leverage leads to a much higher 27-43% cut in our EPS
estimates for these years. Idea remains the most leveraged to the evolving competitive
and regulatory dynamics in the Indian wireless industry. Valuations appear rich in the
backdrop of potential risks and possibility of earnings downgrades ahead. REDUCE.


Cut estimates to factor in 2QFY11 volume/pricing disappointment and competitive dynamics
Before we delve into the details of our earnings changes, we note that Idea’s high operating and
financial leverage results in modest changes in EBITDA estimate translating into substantial %
change in EPS estimates—hence, looking at EPS estimate changes or EPS-based relative multiples
may not yield the true picture.
Exhibit 1 depicts the key changes to our earnings estimates for Idea. We reduce our revenue and
EBITDA estimates for FY2011-13E by 2-4% and 6-7%, respectively, driven by (1) 2% reduction in
network traffic estimate for FY2011E and 3-4% increase in the same for FY2012-13E, (2) 1%
reduction in our RPM estimate for FY2012/13E, (3) higher-than-earlier estimated 3G network
rollout-related opex, and (4) lower wireless margin assumptions, on account of lower RPM, and
higher employee and network expenses. Increase in revenue/EBITDA assumptions for Indus
mitigates some of the reduction in standalone wireless estimates.
The above changes translate into a 29% cut in FY2011E EPS to Rs1.57, 43% cut in FY2012E EPS
to Rs0.86, and 27% cut in FY2013E EPS to Rs2.05. We also note that we have reduced our
subscriber assumptions for Idea noting recent weak trajectory and potential impact of ongoing
subs verification process. Even as subs-based metrics serve little purpose, our ARPU estimates are
up 0.2-0.9% for FY2011-13E to Rs177-162 and MOU estimates are up 2% each for FY2012E and
FY2013E. We now build in MOU of 418, 413 and 409 min/sub/month for FY2011E, FY2012E and
FY2013E, respectively.

Valuations remain expensive; reiterate REDUCE
Idea trades at 10.2X FY2011E and 8.6XFY2012E EBTIDA, a substantial premium to Bharti and
other emerging market players, even after using benign assumptions on competition and tariffs.
We continue to believe that the Idea stock has an in-built M&A premium, which could sustain the
stock at levels higher than our fair value estimates. However, returns from the current levels would
hinge on further earnings upgrades—Idea would need to deliver positive surprise on execution
over the coming quarters, not an easy task, in our view. We like Idea’s execution and strategic
moves but find the competitive challenge daunting. We reiterate our REDUCE rating on the stock.
Our DCF-based target price remains unchanged at Rs55/share (builds in Rs15/share from Indus).