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IDEA CELLULAR
Uncertainties still remain
Subscriber-driven revenue growth; MoU disappoints
Idea Cellular’s (Idea) Q3FY11 performance was in line with our estimates, but
above the Street’s. Consolidated revenues jumped 8.1% Q-o-Q, to INR 39.6 bn,
led by strong subscriber growth of 10.2% Q-o-Q. RPM continued to decline,
down 1.4%, while growth in MoU (at 401) at only 1.8% Q-o-Q was disappointing
(since Q3 is seasonally strong, MoU was expected to bounce back after 5.1%
decline in Q2). Prepaid churn rate jumped to 10.3% from 8.2% in Q2.
Consolidated EBITDA margin was flat Q-o-Q at 24%. New circle losses dipped
marginally by ~3% Q-o-Q, while Indus EBITDA margin improved 360bps Q-o-Q.
Strong revenue growth, stable depreciation, and lower net interest costs (down
8.4% Q-o-Q) and tax rate (7.4% versus 7.1% in Q2) led to 35% rise in profit.
Company positive on RPM and margin defence
The company witnessed higher churn of 10.3% in Q3FY11, yet margins remained
stable. We were surprised that the higher churn didn’t impact margins. While we
believe, the intensity of RPM decline will increase due to MNP (as initial schemes
for postpaid customers are quite competitive), the company expects RPM decline
to moderate. As both Bharti and Idea compute RPM based on total revenues
(voice and data) but just voice minutes, the reported RPM could trend upwards if
the proportion of data revenues increases after the launch of 3G services. Our
initial findings in the Mumbai circle suggest that Idea is targeting the current
average company level RPM (rental of INR 179 per month and 400 minutes free
talk time, both similar to Idea’s current average ARPU and MoU) from the new
postpaid customers it expects to win through MNP.
Outlook and valuations: Uncertainties still remain; maintain ‘HOLD’
The Street was enthused with Idea’s Q3FY11 performance but we believe there
are still several uncertainties including the imminent TRAI recommendations on
2G spectrum pricing, impact of MNP and 3G services launch. Idea’s initial offer to
postpaid customers (targeting average company ARPU from high-end customers
of Bharti and Vodafone) in Mumbai seems to indicate that the race for subscriber
market share continues. We have raised FY11E and FY12E revenues by 3% and
14%, respectively, to factor in higher-than-estimated subscriber growth, though
our EBITDA estimates are lower (-6.5%/-3.1%), as the pace of decline in losses
in new circles is slower than we anticipated. Also, post incorporating the lower
capex guidance of INR 30 bn (versus INR 40 bn earlier), our revised earnings
estimates are +7.7%/-1.4%. At 7.3x FY12E EV/EBITDA, we maintain
‘HOLD/Sector Performer’ on Idea.
Company Description
Idea is India’s fifth largest telecom operator with a subscriber base of 74 mn in
September 2010, and has the third largest with revenue market share of ~13% in FY10.
The company is a pure play GSM operator with pan-India operations including two circles
of Punjab and Karnataka which it obtained via acquisition of Spice Communication. Idea
is the incumbent licensee in seven circles of operation and is the market leader in three
circles of Maharashtra, Haryana, and Uttar Pradesh (West).
Investment Theme
We expect competitive intensity to increase following the implementation of MNP and
launch of 3G services. Idea, due to its strong branding, will have an opportunity to
increase market share due to MNP. Its margins are expected to improve as the
operations in its new circles turnaround and rise to stable state margins. It is expected to
report CAGR of 18.4% in EBITDA over FY11-13E.
Key Risks
We expect Idea to gain market share due to MNP. However, if incumbents like Bharti and
Vodafone get aggressive and defend market share successfully and other operators like
Tata Docomo, RCOM and Aircel target Idea customers, then its market share will be at
risk. If the new circles fail to turnaround then margin improvement will not happen.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
IDEA CELLULAR
Uncertainties still remain
Subscriber-driven revenue growth; MoU disappoints
Idea Cellular’s (Idea) Q3FY11 performance was in line with our estimates, but
above the Street’s. Consolidated revenues jumped 8.1% Q-o-Q, to INR 39.6 bn,
led by strong subscriber growth of 10.2% Q-o-Q. RPM continued to decline,
down 1.4%, while growth in MoU (at 401) at only 1.8% Q-o-Q was disappointing
(since Q3 is seasonally strong, MoU was expected to bounce back after 5.1%
decline in Q2). Prepaid churn rate jumped to 10.3% from 8.2% in Q2.
Consolidated EBITDA margin was flat Q-o-Q at 24%. New circle losses dipped
marginally by ~3% Q-o-Q, while Indus EBITDA margin improved 360bps Q-o-Q.
Strong revenue growth, stable depreciation, and lower net interest costs (down
8.4% Q-o-Q) and tax rate (7.4% versus 7.1% in Q2) led to 35% rise in profit.
Company positive on RPM and margin defence
The company witnessed higher churn of 10.3% in Q3FY11, yet margins remained
stable. We were surprised that the higher churn didn’t impact margins. While we
believe, the intensity of RPM decline will increase due to MNP (as initial schemes
for postpaid customers are quite competitive), the company expects RPM decline
to moderate. As both Bharti and Idea compute RPM based on total revenues
(voice and data) but just voice minutes, the reported RPM could trend upwards if
the proportion of data revenues increases after the launch of 3G services. Our
initial findings in the Mumbai circle suggest that Idea is targeting the current
average company level RPM (rental of INR 179 per month and 400 minutes free
talk time, both similar to Idea’s current average ARPU and MoU) from the new
postpaid customers it expects to win through MNP.
Outlook and valuations: Uncertainties still remain; maintain ‘HOLD’
The Street was enthused with Idea’s Q3FY11 performance but we believe there
are still several uncertainties including the imminent TRAI recommendations on
2G spectrum pricing, impact of MNP and 3G services launch. Idea’s initial offer to
postpaid customers (targeting average company ARPU from high-end customers
of Bharti and Vodafone) in Mumbai seems to indicate that the race for subscriber
market share continues. We have raised FY11E and FY12E revenues by 3% and
14%, respectively, to factor in higher-than-estimated subscriber growth, though
our EBITDA estimates are lower (-6.5%/-3.1%), as the pace of decline in losses
in new circles is slower than we anticipated. Also, post incorporating the lower
capex guidance of INR 30 bn (versus INR 40 bn earlier), our revised earnings
estimates are +7.7%/-1.4%. At 7.3x FY12E EV/EBITDA, we maintain
‘HOLD/Sector Performer’ on Idea.
Company Description
Idea is India’s fifth largest telecom operator with a subscriber base of 74 mn in
September 2010, and has the third largest with revenue market share of ~13% in FY10.
The company is a pure play GSM operator with pan-India operations including two circles
of Punjab and Karnataka which it obtained via acquisition of Spice Communication. Idea
is the incumbent licensee in seven circles of operation and is the market leader in three
circles of Maharashtra, Haryana, and Uttar Pradesh (West).
Investment Theme
We expect competitive intensity to increase following the implementation of MNP and
launch of 3G services. Idea, due to its strong branding, will have an opportunity to
increase market share due to MNP. Its margins are expected to improve as the
operations in its new circles turnaround and rise to stable state margins. It is expected to
report CAGR of 18.4% in EBITDA over FY11-13E.
Key Risks
We expect Idea to gain market share due to MNP. However, if incumbents like Bharti and
Vodafone get aggressive and defend market share successfully and other operators like
Tata Docomo, RCOM and Aircel target Idea customers, then its market share will be at
risk. If the new circles fail to turnaround then margin improvement will not happen.
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