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No growth in revenue due to erosion in key performance indicators (KPIs): For
2QFY2011, Idea reported dismal numbers with revenue flat at `3,659cr (v/s our
estimate of `3,828cr), primarily on the back of tumbling minutes of usage (MOU)
and fall in average revenue per minute (ARPM). MOU dropped by 5% qoq to
394mins (v/s our estimate of 411mins). ARPM also slipped to `0.42/min with a
4.5% qoq decline (v/s our estimate of `0.43/min). Subscriber growth stood at
7.7% qoq, taking the overall subscriber base to 74.2mn. Average revenue per
user (ARPU) slipped by 8.2% qoq to `167 (v/s our estimate of `178).
Decline in EBITDA margin restricted even with poor KPIs: Despite significant
erosion in KPIs of the mobility business in 2QFY2011, EBITDA per minute (EPM)
fell only by 3.4% qoq to `0.10/min because of significant improvement in EBITDA
margin for new service areas as well as the Indus Tower business. These
operational gains helped Idea’s overall operational profitability, leading to a
30bp qoq decline in EBITDA margin to 24%, despite poor KPIs and cost pressures
such as annual wage increment, which negatively affected margin by 123bp qoq.
Outlook and valuation: We expect MOU to expand moderately in 2HY2011;
however, growth is likely to cease beyond that because of the further increase in
capacity due to launch by various new operators in new circles. Voice ARPM is
likely to remain under pressure. At the CMP, the stock is trading at EV/EBITDA of
8.2x FY2012, which is on the higher side compared to Indian Telecom leader
Bharti Airtel, which is trading at EV/EBITDA of 6.6x FY2012, even with superior
KPIs and better balance sheet. Further erosion in KPIs due to over capacity and
increased leverage relating to 3G rollout makes the stock expensive at these
levels. Hence, valuing Idea at EV/EBITDA of 7.5x FY2012, we maintain our
Reduce rating with a Target Price of `59.
No growth in mobility revenue due to erosion in KPIs
The mobility segment’s revenue remained flat qoq at `3635.6cr on the back of
tumbling MOU as well as falling ARPM. MOU witnessed a fall on the back of
seasonally weak quarter as well as over capacity created due to new operators
launching in various circles. This resulted in a steep decline in MOU by 5.1% qoq
to 394mins (v/s our estimate of 411mins).
During the quarter, the tail-end effect of the price war continued, with voice ARPM
still under pressure. However, improvement in VAS share arrested the decline in
overall ARPM. During 2QFY2011, Idea managed to improve its VAS share by
30bp qoq to 12.9%, with ARPM declining by 4.5% qoq to `0.42/min.
Net addition in subscriber base tapered off in 1HFY2011, as compared to
2HFY2010. However, additions on a qoq basis stood higher at 5.3mn subscribers
(v/s only 5mn subscribers in 1QFY2011), an increase of 5.3% qoq. Thus, higher
net additions in subscriber base in 2QFY2011 arrested the steep downfall in ARPU,
which was negatively affected by poor MOU and lower ARPM.
EBITDA margin’s decline restricted even with poor KPIs
Despite significant erosion in the KPIs of the mobility business in 2QFY2011, EPM
fell by only 3.4% qoq to `0.10/min because of significant improvement in EBITDA
margins for the NSA and Indus Tower businesses. During the quarter, revenue for
established services areas (ESA) stood at `3,350.7cr, down 1% qoq, with EBITDA
margin slipping by 60bp to 27% in 2QFY2011. During the quarter, revenue of the
NSA business grew by 10.5% qoq to `338.4cr, with EBITDA losses declining to
42.2% from 45.7% in 1QFY2011. In addition, the Indus Tower business showed
8.7% qoq revenue growth to `277cr on the back of improved tenancy ratio. In
fact, EBITDA margin expanded by 510bp qoq to 42.2% for the Indus Tower
business. These operational gains in NSA business and the Indus Tower business
helped the overall operational profitability, leading to a 30bp decline in EBITDA
margin despite poor KPIs as well as cost pressures such as annual wage increment,
which negatively affected the margin by 123bp qoq.
NLD revenue growing at a strong pace
Idea has been witnessing a secular trend of strong growth in minute on network
for national long distance (NLD) calls. Growth was subdued at 3.6% qoq in
2QFY2011 due to the seasonality effect, but operational performance was strong
with 230bp qoq improvement in EBIT margin to 44.9%.
Investment arguments
Overall ARPU to remain under pressure
Going forward, we expect MOU to expand at a moderate pace in 2HY2011.
However, growth is expected to cease beyond that because of the ever-increasing
over capacity. Voice ARPM is expected to remain under pressure. However,
improvement in VAS share will help to arrest the downfall in overall ARPM. Thus,
we expect ARPU to continue its free fall, with decent subscriber growth rate
supporting growth in the mobility segment’s revenue, which is expected to witness
an 18.6% CAGR over FY2010–12.
EBITDA margin to rebound in FY2012
Idea’s EBITDA margin attained a new lower orbit in 1HFY2011 at 24.2% v/s
27.4% in FY2010 on the back of increased license and spectrum-related charges
as well as increasing roaming and access charges due to the entry of new
operators. Going forward, we expect EBITDA margin to expand primarily due to
network rollout expected to be done, with the backhaul being the company’s
owned sites, which will result in lower network operating expenditure. Hence, we
expect EBITDA margin to rebound only in FY2012 to 25.1% after slumping to
24.6% in FY2011.
3G rollout – Heavy on balance sheet, likely to erode profitability due to
higher capital charges
In 2QFY2011, Idea was awarded the 3G spectrum in all the 11 important service
areas, where it is in the process of rolling out extensive 3G networks. Further, Idea
is pursuing long-term arrangements with select quality operators for service areas
where the company was not awarded 3G spectrum. The launch of 3G services is
expected any time around the end of CY2010.
In 1QFY2011, Idea had taken a debt of `5,768cr to fund the buyout of 3G license
in 11 circles, which escalated its net debt–to-EBITDA from 2.2x to 3.2x FY2010
EBITDA. The rollout needs additional capex of `3,200cr in 2HFY2011, which will
be again funded through debt escalating this ratio further to 4.3x. Also, net
profitability will erode as capital charges such as amortisation of 3G license fee
and interest expense (~`160cr for 1HFY2011) on debt-related to procurement of
the same, which is getting capitalised as of now, will start getting charged directly
to the company’s profit and loss account. Thus, we expect net profit margin to be
nearly halved from 7.7% in FY2010 to 3.3% in FY2012E.
Valuations
At the CMP, the stock is trading at EV/EBITDA of 8.2x FY2012, which is on the
higher side compared to Indian Telecom leader Bharti Airtel, which is trading at
EV/EBITDA of 6.6x FY2012, even with superior KPIs and better balance sheet. The
stock has been trading at 5–10x one-year forward EV/EBITDA since the past one
year. Further erosion in KPIs due to over capacity and further increase in leverage
relating to 3G rollout makes the stock expensive at these levels. Hence, we value
the stock at EV/EBITDA of 7.5x FY2012E, i.e. average of the above band
mentioned. At current levels, we continue to maintain our Reduce rating on the
stock with a Target Price of `59.
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