Idea Cellular - Festive cheers but no upgrades: Emkay

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Idea Cellular

Festive cheers but no upgrades

SELL

CMP: Rs 71                                       Target Price: Rs 60

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n     Q3FY11 PAT at Rs2.4bn (v/s our est. Rs1.8bn) and EBIDTA at Rs9.5bn (v/s our est. 9.1bn), festive season drives volume growth but higher opex keeps the EBITDA margin flat qoq

n     Strong revenue growth of 8.1% qoq to Rs39.6 bn v/s our estimate of Rs38.1bn

n     Robust 10.2% rise in traffic on network. ARPU improves to Rs168 v/s Rs 167 in Q2FY11. MOUs rise to 401 v/s 394 in Q2FY11

n     Valuations expensive at 9.7x & 8.2x EV/EBIDTA for FY11E & FY12E respectively. Prefer Bharti Airtel available at 6.9x FY12E EV/EBIDTA. Retain SELL rating with target Rs60

Revenue growth, profits ahead of estimates

On account of festive season, Idea registered robust subscriber addition of 7.8mn and

10.2% qoq rise in traffic on network. Con. revenue grew by 8.1% qoq, the growth was

led by stabilization in KPI’s. ARPU stood at Rs 168 v/s 167 in Q2FY11, ARPM flat at

Rs0.42 and MoU at 401. Despite of healthy revenue growth EBIDTA margins remained

flat at 24% qoq due to rise in SG&A cost and other exp. PAT at Rs2.4bn was higher

than estimate of Rs 1.8bn and Rs2.0bn, respectively, aided by one-off item of Rs110mn

in interest cost and one time other income in Indus also boosted the share of profit from

Indus to Rs222mn from Rs168mn in Q2FY11.

Festivities support stable KPI’s

Strong subscriber growth of 10.2% and improvement in MoU resulted in 10.1% qoq rise

in traffic on network to 93.5bn minutes v/s 84.8bn minutes. ARPU at Rs168 improved

qoq v/s 8.2% qoq decline in Q2FY11. Stable tariffs restricted decline in ARPM that

stood at Rs 0.42.

Absolute EBIDTA grows by 8% QoQ but margins remain flat

EBITDA grew by 8% qoq to Rs 9.5bn v/s our estimate of Rs 9.1bn. Sequentially,

revenue grew by 7% and 17% from existing and new circles, respectively. However,

EBITDA margin in existing circles declined by 30bps and absolute losses from new

circle remain flat qoq. This was due to 33% and 21% qoq rise in SG&A and other

expenses, owing to higher advertisement cost and one time expense of Rs75mn in

other expenditure. SG&A is likely to remain high due to impending launch of 3G

services.

Capex guidance reduced to Rs30bn for FY11E

Ideas has reduced its capex guidance from Rs 40bn to Rs 30bn for FY11E. The lowered

guidance is on account of some spill over to coming quarter and savings against earlier

estimates. Net-debt during Q3FY11 remained flat qoq at Rs93bn, we expect it to

increase to Rs124bn for FY11E, which implies net-debt/ EBIDTA of 3.4x for FY11E.

Valuations 7.8x FY12E EV/EBIDTA expensive v/s Bharti – Retain SELL

On account of lower tax rate we have revised our FY11E EPS estimates upward by

8.7% to Rs2.6. At CMP of Rs72, Idea trades at 9.7x and 8.2x EV/EBIDTA and 28x and

27x estimated EPS of Rs2.6 and Rs2.7 for FY11E and FY12E respectively. We

maintain SELL rating on the stock with target price of Rs60.