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Idea Cellular Ltd -------------------------------------------------------------- Maintain OUTPERFORM
Management call takeaways: Stable competition, encouraging margin outlook
● Idea results surprised positively with acceleration in revenue
growth, stable pricing and its positive margin outlook.
Management explained in the call that pricing competition could
be largely over and margins should improve in the medium term.
● The company explained that the increase in scale should lead to
margin improvement from network opex and subscriber
acquisition costs. Management is also focused on reducing the
EBITDA losses of new circles. The company clearly indicated that
it would not hesitate in sacrificing growth to improve margins in
these circles.
● While we delay the onset of margin improvement by two quarters,
we continue to build in a 600 bp margin improvement over the
next two years. Around 350 bp of this improvement should come
from lower losses in new circles and the rest from higher scale.
● Changes in our subscriber estimates and a pull forward of 3Grelated
interest/amortisation costs lead to a 4%/2% reduction in
our FY12/13E EPS. Rolling forward our DCF model, we increase
our target price to Rs85. Maintain OUTPERFORM rating.
Stability in pricing environment
In light of the deceleration in the rate of RPM decline (1.2% QoQ in
Dec-10 quarter versus average 7% in the previous four quarters),
management explained that the worst in terms of price competition
appears to be over. Pricing could be flattening out, with the current
price points uneconomical for some of the new entrants. Management
indicated that the impact of MNP on RPM from the postpaid segment
will be negligible. Postpaid RPMs have also been declining over the
years, and the gap between prepaid and postpaid RPMs will not
converge sharply.
Margins could improve over the long term
Management highlighted two margin levers: (1) network opex should
come down (as proportion of revenues) with an increase in sharing
and capacity utilisation, and (2) stable acquisition costs per subscriber
should lead to lower (as a proportion of sales) subscriber acquisition
costs as the proportion of gross adds to overall size of business
continues to decline. Management also indicated its resolve to reduce
EBITDA losses in new circles even if it leads to slower expansion.
We currently build in a 600 bp margin expansion over the next two
years: (1) 350 bp due to lower losses in new circles and (2) 250 bp
due to lower competition and increasing scale.
Other important highlights
● Management explained that the cut in FY3/11 capex guidance
from Rs40 bn to Rs30 bn was driven by a combination of: (1)
overflow of some capex to next year and (2) better-than-expected
pricing terms with vendors.
● The Dec-10 quarter had two one-off items impacting margins: (1)
write-back of some provisions in network opex (benefit of 40 bp)
and (2) some one-off projects in ‘other expenses’ (hit of 20 bp).
● Management is confident of breaking even on FCF in FY3/12
(FY3/11 also being a break-even year ignoring 3G spectrum fee).
Retain positive stance
Strong revenue growth, stable pricing and positive margin outlook give
us confidence on our positive call on the stock. Post results, we
update our estimates to reflect: (1) higher subscriber addition, (2) two
quarter delay in margin improvement and (3) higher depreciation
costs. We also partially cut our FY3/11E EPS on 3G-related interest
and amortisation costs. While our EBITDA number broadly remains
stable for FY12/13E, higher depreciation leads to a slight reduction in
EPS. Rolling forward our EPS model, we increase our target price to
Rs85. We maintain our OUTPERFPORM rating on the shares.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Idea Cellular Ltd -------------------------------------------------------------- Maintain OUTPERFORM
Management call takeaways: Stable competition, encouraging margin outlook
● Idea results surprised positively with acceleration in revenue
growth, stable pricing and its positive margin outlook.
Management explained in the call that pricing competition could
be largely over and margins should improve in the medium term.
● The company explained that the increase in scale should lead to
margin improvement from network opex and subscriber
acquisition costs. Management is also focused on reducing the
EBITDA losses of new circles. The company clearly indicated that
it would not hesitate in sacrificing growth to improve margins in
these circles.
● While we delay the onset of margin improvement by two quarters,
we continue to build in a 600 bp margin improvement over the
next two years. Around 350 bp of this improvement should come
from lower losses in new circles and the rest from higher scale.
● Changes in our subscriber estimates and a pull forward of 3Grelated
interest/amortisation costs lead to a 4%/2% reduction in
our FY12/13E EPS. Rolling forward our DCF model, we increase
our target price to Rs85. Maintain OUTPERFORM rating.
Stability in pricing environment
In light of the deceleration in the rate of RPM decline (1.2% QoQ in
Dec-10 quarter versus average 7% in the previous four quarters),
management explained that the worst in terms of price competition
appears to be over. Pricing could be flattening out, with the current
price points uneconomical for some of the new entrants. Management
indicated that the impact of MNP on RPM from the postpaid segment
will be negligible. Postpaid RPMs have also been declining over the
years, and the gap between prepaid and postpaid RPMs will not
converge sharply.
Margins could improve over the long term
Management highlighted two margin levers: (1) network opex should
come down (as proportion of revenues) with an increase in sharing
and capacity utilisation, and (2) stable acquisition costs per subscriber
should lead to lower (as a proportion of sales) subscriber acquisition
costs as the proportion of gross adds to overall size of business
continues to decline. Management also indicated its resolve to reduce
EBITDA losses in new circles even if it leads to slower expansion.
We currently build in a 600 bp margin expansion over the next two
years: (1) 350 bp due to lower losses in new circles and (2) 250 bp
due to lower competition and increasing scale.
Other important highlights
● Management explained that the cut in FY3/11 capex guidance
from Rs40 bn to Rs30 bn was driven by a combination of: (1)
overflow of some capex to next year and (2) better-than-expected
pricing terms with vendors.
● The Dec-10 quarter had two one-off items impacting margins: (1)
write-back of some provisions in network opex (benefit of 40 bp)
and (2) some one-off projects in ‘other expenses’ (hit of 20 bp).
● Management is confident of breaking even on FCF in FY3/12
(FY3/11 also being a break-even year ignoring 3G spectrum fee).
Retain positive stance
Strong revenue growth, stable pricing and positive margin outlook give
us confidence on our positive call on the stock. Post results, we
update our estimates to reflect: (1) higher subscriber addition, (2) two
quarter delay in margin improvement and (3) higher depreciation
costs. We also partially cut our FY3/11E EPS on 3G-related interest
and amortisation costs. While our EBITDA number broadly remains
stable for FY12/13E, higher depreciation leads to a slight reduction in
EPS. Rolling forward our EPS model, we increase our target price to
Rs85. We maintain our OUTPERFPORM rating on the shares.
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