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Idea Cellular Ltd. -3Q surprises; growth to slow
„3Q events refuel expectations of ownership change
Idea posted better-than-expected 3Q net profit of Rs2.4bn, up 35% QoQ. Key 3Qrelated events that have likely re-fueled market expectations of a potential
ownership change include: 1) the resignation of the CEO – Mr Sanjeev Aga, 2)
potential valuation upside from recent strong subscriber additions; Idea’s net adds
are up from ~1.7mn per month in 1H FY11 to ~2.9mn per month in Nov/Dec 2010,
and 3) prima facie, slower-than-peers timetable for 3G rollout.
Results beat expectations despite margin pressure
In 3Q, all revenue drivers posted QoQ improvement; net adds accelerated,
minutes grew strongly and the fall in revenue per minute (rpm) was marginal. We
flag 2 areas of concern: 1) slipping margins despite stable tariffs; 2) rising churn.
F’casts tweaked; revenue uplift offset by weak margins
Factoring in 3Q trends, we have lifted our FY11-12E revenue forecasts by 4-10%,
but EBITDA stays largely unchanged due to lower margins vs. earlier. We expect
margin slippage to continue, led by network expansion and inflationary pressures
in 1H CY11 and potential impact of mobile number portability (MNP) in 2H CY11.
Mgt. emphasizes seasonal momentum; downplays MNP
On its post-results call, top management attributed the strong improvement in
both net adds and traffic minutes to pronounced seasonality, led by relatively high
exposure to rural India. The company does not expect MNP to dramatically hurt
post-paid rpm.
Rich valuations; possible low M&A upside for minorities
Our Underperform rating on Idea reflects its already rich valuation, at ~8x FY12-
EV/EBITDA. Returns for minorities from a potential open offer could also be low
3Q FY11 result highlights
Robust top line and one-off cost savings drive +ve surprise: Idea reported
3Q net profit of Rs2.4bn, up 35% QoQ. Operating performance (EBITDA) was 1-
4% higher than consensus and our expectations. The positive surprise was driven
by 2 key factors: 1) a lower-than-expected fall in tariffs and the consequent robust
top line, 2) a write-back of network costs on settlement of bills with Indus.
All revenue drivers post QoQ improvement: Idea’s wireless revenues grew
9% QoQ, 2% above our expectations, due to tad stronger subscriber momentum
and lower tariff attrition than expected. Revenue per minute (rpm) fell 1% QoQ, to
42paise, versus our expectation of a 2% QoQ fall. Traffic grew 10% QoQ, owing
to a seasonal recovery in usage (MoU/sub rose 2% QoQ to 401mins/mth) and 9%
growth in average subscriber base.
Margin slippage continues, despite stable tariffs; churn up sharply:
During 3Q, reported EBITDA margin in Idea’s established circles fell 30bps QoQ.
However, lower losses in new circles helped to moderate the overall margin
decline. Overall, margin in the mobility business fell 10bps QoQ. In 3Q, Idea’s
subscriber churn rose sharply from 8% to 10%.
Network cost savings – not fully sustainable: In 3Q FY11, Idea’s network
costs fell from ~39% of revenues to ~36% of revenues, and rupee-costs stayed
flat QoQ. Our conversation with Idea indicates that the settlement of dues with
Indus resulted in lower network costs than previously provisioned. Also, the
company witnessed a saving in power costs during 3Q.
Indus margins expand sharply, despite flattish top line: Based on Idea’s
disclosure, we estimate that Indus witnessed strong QoQ savings in operating
costs during 3Q. Indus’ EBITDA margin expanded ~400bps QoQ, although the
top line was flattish QoQ.
Interest burden eases pending 3G launch: Idea’s consolidated interest
burden fell 8% QoQ pending launch of 3G operations. This reflects 1) lower net
debt excluding 3G outgo, and 2) the absence of oa ne-time interest provision that
had impacted 2Q results.
Capex guidance cut once again: Idea cut its FY11E capex guidance to Rs30bn
vs. Rs40bn estimated earlier. The company said this reflects some spillover into
the next year, as savings against earlier estimates.
3G rollout over few months: Idea expects to launch 3G services in the next
few months.
Price objective basis & risk
Idea Cellular (IDEAF)
Our PO of Rs65/sh for Idea is based on DCF. Our PO implies a valuation of 7.5x
FY12E-EV/EBITDA, i.e., a 35% premium vs. GEM wireless majors to allow for
stronger long-term growth potential if 3G ramps up. Sooner-than-expected
industry consolidation and stronger-than-anticipated Indus profitability could
present upside to our PO. Significantly higher competitive intensity in the industry
and dramatic regulatory changes pose downside risks.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Idea Cellular Ltd. -3Q surprises; growth to slow
„3Q events refuel expectations of ownership change
Idea posted better-than-expected 3Q net profit of Rs2.4bn, up 35% QoQ. Key 3Qrelated events that have likely re-fueled market expectations of a potential
ownership change include: 1) the resignation of the CEO – Mr Sanjeev Aga, 2)
potential valuation upside from recent strong subscriber additions; Idea’s net adds
are up from ~1.7mn per month in 1H FY11 to ~2.9mn per month in Nov/Dec 2010,
and 3) prima facie, slower-than-peers timetable for 3G rollout.
Results beat expectations despite margin pressure
In 3Q, all revenue drivers posted QoQ improvement; net adds accelerated,
minutes grew strongly and the fall in revenue per minute (rpm) was marginal. We
flag 2 areas of concern: 1) slipping margins despite stable tariffs; 2) rising churn.
F’casts tweaked; revenue uplift offset by weak margins
Factoring in 3Q trends, we have lifted our FY11-12E revenue forecasts by 4-10%,
but EBITDA stays largely unchanged due to lower margins vs. earlier. We expect
margin slippage to continue, led by network expansion and inflationary pressures
in 1H CY11 and potential impact of mobile number portability (MNP) in 2H CY11.
Mgt. emphasizes seasonal momentum; downplays MNP
On its post-results call, top management attributed the strong improvement in
both net adds and traffic minutes to pronounced seasonality, led by relatively high
exposure to rural India. The company does not expect MNP to dramatically hurt
post-paid rpm.
Rich valuations; possible low M&A upside for minorities
Our Underperform rating on Idea reflects its already rich valuation, at ~8x FY12-
EV/EBITDA. Returns for minorities from a potential open offer could also be low
3Q FY11 result highlights
Robust top line and one-off cost savings drive +ve surprise: Idea reported
3Q net profit of Rs2.4bn, up 35% QoQ. Operating performance (EBITDA) was 1-
4% higher than consensus and our expectations. The positive surprise was driven
by 2 key factors: 1) a lower-than-expected fall in tariffs and the consequent robust
top line, 2) a write-back of network costs on settlement of bills with Indus.
All revenue drivers post QoQ improvement: Idea’s wireless revenues grew
9% QoQ, 2% above our expectations, due to tad stronger subscriber momentum
and lower tariff attrition than expected. Revenue per minute (rpm) fell 1% QoQ, to
42paise, versus our expectation of a 2% QoQ fall. Traffic grew 10% QoQ, owing
to a seasonal recovery in usage (MoU/sub rose 2% QoQ to 401mins/mth) and 9%
growth in average subscriber base.
Margin slippage continues, despite stable tariffs; churn up sharply:
During 3Q, reported EBITDA margin in Idea’s established circles fell 30bps QoQ.
However, lower losses in new circles helped to moderate the overall margin
decline. Overall, margin in the mobility business fell 10bps QoQ. In 3Q, Idea’s
subscriber churn rose sharply from 8% to 10%.
Network cost savings – not fully sustainable: In 3Q FY11, Idea’s network
costs fell from ~39% of revenues to ~36% of revenues, and rupee-costs stayed
flat QoQ. Our conversation with Idea indicates that the settlement of dues with
Indus resulted in lower network costs than previously provisioned. Also, the
company witnessed a saving in power costs during 3Q.
Indus margins expand sharply, despite flattish top line: Based on Idea’s
disclosure, we estimate that Indus witnessed strong QoQ savings in operating
costs during 3Q. Indus’ EBITDA margin expanded ~400bps QoQ, although the
top line was flattish QoQ.
Interest burden eases pending 3G launch: Idea’s consolidated interest
burden fell 8% QoQ pending launch of 3G operations. This reflects 1) lower net
debt excluding 3G outgo, and 2) the absence of oa ne-time interest provision that
had impacted 2Q results.
Capex guidance cut once again: Idea cut its FY11E capex guidance to Rs30bn
vs. Rs40bn estimated earlier. The company said this reflects some spillover into
the next year, as savings against earlier estimates.
3G rollout over few months: Idea expects to launch 3G services in the next
few months.
Price objective basis & risk
Idea Cellular (IDEAF)
Our PO of Rs65/sh for Idea is based on DCF. Our PO implies a valuation of 7.5x
FY12E-EV/EBITDA, i.e., a 35% premium vs. GEM wireless majors to allow for
stronger long-term growth potential if 3G ramps up. Sooner-than-expected
industry consolidation and stronger-than-anticipated Indus profitability could
present upside to our PO. Significantly higher competitive intensity in the industry
and dramatic regulatory changes pose downside risks.
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