Visit http://indiaer.blogspot.com/ for complete details Idea: Stretched valuations, no positive triggers in sight
Idea's stock trades at an EV/EBITDA of 7.5x FY12E EBITDA, an 8% premium
to Bharti (6.9x EV/EBITDA). We believe this is not justified owing to Bharti's
superior operating metrics. Bharti reported EBITDA margins of 36.1% v/s
24.3% for Idea (1QFY11), return on equity of 16.6% v/s 7.7% for Idea (FY11E)
and had a net-debt equity ratio of 0.1x at the end of FY10 (0.6x for Idea).
Even post-Zain and debt taken on for 3G spectrum, we expect Bharti's net
debt-equity ratio to stand at 0.9x and 0.6x in FY11 and FY12, respectively
as compared with 1x and 0.8x, respectively for Idea Cellular.
• 3G service launch unlikely to have significant impact on financials: We have
factored in 3G revenues for Idea post receipt of 3G spectrum last month.
We forecast 1.6 mn 3G subscribers in FY12 and ARPU of Rs 600/month,
leading to 7% and 6% increases in FY12E top-line and EBITDA, respectively.
Owing to higher amortisation costs of Rs 2.9 bn (20-year amortisation
period for 3G spectrum costs), net profit falls by 19% v/s earlier estimates.
We believe it could take 3-4 years before Idea can witness returns on its
3G investments.
• MNP, another headwind: Mobile number portability (MNP) is to be launched
in India on October 31, 2010, which is likely to be another headwind for
the sector. MNP is likely to lead to a price war in the post-paid segment of
the market and could hurt margins going forward by 100 bps.
• Maintain 'Under performer': We maintain an 'Under performer' rating on
Idea Cellular owing to expensive valuations with a target price of Rs 66,
implying an EV/EBITDA multiple of 7x FY12E EBITDA.
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