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Idea Cellular – Watch Margin and Capex
Idea Cellular posted strong net adds in Oct and Nov at 1.8m and 2.8m, respectively.
We believe it has taken some share and also benefited from the holiday season.
While we expect a better trend than in Q2, we also expect to see continued ARPM
pressure and forecast a 1.3% or 0.6paisa Q/Q decline to INR0.42. This drives our
standalone revenue estimate to INR38.6bn or a 4.6% Q/Q increase. Our consolidated
revenue estimate is INR38.3bn, +4.8% Q/Q.
Our concerns are around Q3 margins as we believe that: [1] SG&A costs can
potentially increase given the higher sub add momentum and also the MNP
advertising; and [2] Network opex could increase, given a full quarter impact of the
removal of the equipment import ban. We forecast 20.3% standalone margin for
Q3FY11, down 40bp Q/Q. Our consolidated margin estimate is 23.8% down 20bp
Q/Q.
We expect EPS to benefit from the lack of 3G amortization impact in the quarter.
Our Q3 EPS is INR0.60, up from INR0.42 earlier.
As of H1 FY11, Idea Cellular had spent only 20% of its INR40bn capex guidance
(which was revised down from guidance of INR40-44bn earlier). We do not expect
Idea to be able to spend all the INR40bn this fiscal year and have therefore revised
our FY11 estimate down to INR35bn.
Idea Cellular
Our Dec-11 price target is INR60. This is driven by INR43 from the core business
and INR16 for its 16% stake in Indus.
Risks to our ratings and price target are: [1] operators staying away from price
competition post 3G/MNP, [2] faster-than-expected growth in profitability in new
circles, [3] monetization of tower assets, and consolidation, M&A in the sector.
Idea Cellular
We have increased our subscriber forecasts for H2 FY11 by 4% and 5% for FY12.
Our revenue estimates are higher by 0.5% and 3.8%, respectively.
However, we remain concerned about margin and reduce our FY11 margin
assumption by ~20bp to 23.7%, as we expect Idea to manage marketing and other
admin costs effectively but we will watch for network opex.
We also reduce our capex estimate for FY11 and expect that to roll over into FY12.
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