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IDEA (IDEA)
Telecom
Strong revenue growth fails to translate into margin expansion. Idea reported a
modest beat on revenue estimates and a massive beat on PAT, despite missing our
EBITDA estimate for 3QFY11. Strong volume-led revenue growth was on expected lines,
but the sharp increase in S&M costs (which impacted margins) was not. Competition is
possibly hurting in more areas than just tariffs – this quarter it was increased churn,
higher trade channel payouts (possibly) and increased ad expenses. Remain Cautious.
3QFY11 – below-EBITDA surprise aids net income beat
Idea’s reported net income of Rs2.43 bn for 3QFY11 came in 23% ahead of our estimated
Rs1.98 bn, despite a 0.4% miss at the EBITDA line (Rs9.48 bn versus estimated Rs9.52 bn).
Net income outperformance was aided by lower-than-expected – (1) net interest cost, (2)
depreciation and amortization, and (3) effective tax rate.
Items (1) and (2) above were a direct result of lower-than-expected capex for the quarter, in our
view – the company has revised down its FY2011E standalone (ex Indus) capex guidance to
Rs30 bn from Rs40 bn guided at end-2QFY11, attributing the same to delay in 3G rollout and
some unexpected savings on capex.
Revenues for the quarter at Rs39.6 bn (+8.1% qoq, +25.6% yoy) were 2.6% ahead of our
estimate, driven by a beat on wireless volume growth estimate.
Volume/revenue beat failed to translate into EBITDA beat as consolidated OPM remained flat
qoq at 24% versus our expectation of a 70 bps expansion. Standalone EBITDA margin fell 10
bps qoq.
Competition impact may not be limited to tariffs
Idea’s RPM for the quarter was 41.8 paise/min, down 1.4% qoq, marking visible deceleration in
pace of RPM decline. However, the same as well as strong 10.3% qoq growth in minutes (versus
expectation of 9%) failed to drive qoq OPM expansion – standalone margins were down 10 bps
qoq. This is in contrast to the high-operating-leverage nature of the business. Margins were hit by
a sharp increase in subscriber acquisition and advertising expenses – Idea indicates a qoq hit of
250 bps on this account. We note that most industry players ran festive season promotions during
the Dec 2010 quarter; increased churn (10.3% in the prepaid segment versus 8.2% in 2QFY11)
also impacted to an extent, in our view. Our channel checks also suggest pressure on trade
channel commissions. Competition can manifest itself in many ways.
Other results highlights
Network rollout was slow, as also reflected in lower-than-guidance capex. Idea added
2,228 cell sites during the quarter, taking the total cell site base to 70,208 at end-Dec
2010.
Idea capitalized a further Rs1.24 bn of interest expenses pertaining to 3G debt. We note
that Idea is yet to launch its 3G services and would continue to capitalize these expenses
for at least a part of 4QFY11E as well. Total 3G-related interest capitalized till date stands
at Rs2.85 bn.
Indus – can’t read much from Idea’s numbers. Idea’s segmental report suggests flat
revenues qoq for Indus with a 360 bps qoq improvement in margins. We note that Idea
reports the impact of the JV to provide a perspective to Idea’s consolidated financials and
indicates that due to differences in accounting treatment, these numbers may not be
representative of financial statements of the JV.
Wireless MOU increased 1.8% qoq to 401 (our expectation was 397) while wireless ARPU
remained steady at 168 (1% ahead of estimate).
Wireless prepaid churn increased sharply to 10.3% (from 8.2% in 2QFY11), higher than
any quarter in the company’s history. This, in addition to higher qoq net adds reported by
Idea (7.6 mn in 3QFY11 versus 5.3 mn in 2QFY11), implies a sharp increase in gross adds
– we estimate gross adds for 3QFY11 at 15.4 mn versus 11 mn in 2QFY11. This leads to
an increase in subscriber acquisition costs, possibly explaining close to 150 bps of the
total 250 bps qoq increase in subs acquisition and ad expenses reported by Idea.
VAS as % of revenues was steady at 13% for the quarter.
Capex, balance sheet – Idea reported a capex of Rs9.5 bn for the quarter taking YTD
FY2011E capex to Rs17.5 bn. The company has revised down its capex guidance for
FY2011E to Rs30 bn from Rs40 bn earlier, attributing the same to delays in roll-out and
unexpected savings. We note that Idea’s CWIP increased by Rs4.4 bn during the quarter.
Consolidated net debt at end-Dec 2010 stood at Rs106.8 bn (same as at end-Sep 2010).
Net debt to EBITDA (on annualized Dec 2010 quarter EBITDA) stands at 2.8X, comfortable
within the ‘new normal’ parameters for the Indian wireless industry.
Even as Idea broadly maintained its EBITDA losses in the new service areas at Rs1.4 bn for
the quarter, EBITDA margins in the established service areas continue to be under
pressure (down 30 bps qoq despite the a strong 7.2% qoq revenue growth). We note
that Idea has been aggressive on pricing in its new circles while holding on to prices (at
premium to new players) in its established circles.
Await earnings call for estimates review; reiterate REDUCE
We shall update our earnings estimates post the company’s 3QFY11 earnings call. Prima
facie, capex spillover into FY2012E will likely lead to an increase in ours and possibly Street’s
EPS estimate for FY2011/12E though we do not see meaningful upside to EBITDA estimates.
Our lower-than-consensus EBITDA estimate for FY2012E demands a 5% EBITDA CQGR from
4QFY11-1QFY12E, while consensus estimates demand 6% – note that this 5-quarter period
includes an expected seasonally weak Sep quarter, and faces challenges from increased 3G
opex (network costs and spectrum charges), and sustained high competitive intensity in the
market (circle-level tariff interventions, MNP, pressure on trade channel payouts, etc.).
Valuations remain stretched at 8.5X FY2012E EV/EBITDA. We retain our REDUCE rating on
the stock.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
IDEA (IDEA)
Telecom
Strong revenue growth fails to translate into margin expansion. Idea reported a
modest beat on revenue estimates and a massive beat on PAT, despite missing our
EBITDA estimate for 3QFY11. Strong volume-led revenue growth was on expected lines,
but the sharp increase in S&M costs (which impacted margins) was not. Competition is
possibly hurting in more areas than just tariffs – this quarter it was increased churn,
higher trade channel payouts (possibly) and increased ad expenses. Remain Cautious.
3QFY11 – below-EBITDA surprise aids net income beat
Idea’s reported net income of Rs2.43 bn for 3QFY11 came in 23% ahead of our estimated
Rs1.98 bn, despite a 0.4% miss at the EBITDA line (Rs9.48 bn versus estimated Rs9.52 bn).
Net income outperformance was aided by lower-than-expected – (1) net interest cost, (2)
depreciation and amortization, and (3) effective tax rate.
Items (1) and (2) above were a direct result of lower-than-expected capex for the quarter, in our
view – the company has revised down its FY2011E standalone (ex Indus) capex guidance to
Rs30 bn from Rs40 bn guided at end-2QFY11, attributing the same to delay in 3G rollout and
some unexpected savings on capex.
Revenues for the quarter at Rs39.6 bn (+8.1% qoq, +25.6% yoy) were 2.6% ahead of our
estimate, driven by a beat on wireless volume growth estimate.
Volume/revenue beat failed to translate into EBITDA beat as consolidated OPM remained flat
qoq at 24% versus our expectation of a 70 bps expansion. Standalone EBITDA margin fell 10
bps qoq.
Competition impact may not be limited to tariffs
Idea’s RPM for the quarter was 41.8 paise/min, down 1.4% qoq, marking visible deceleration in
pace of RPM decline. However, the same as well as strong 10.3% qoq growth in minutes (versus
expectation of 9%) failed to drive qoq OPM expansion – standalone margins were down 10 bps
qoq. This is in contrast to the high-operating-leverage nature of the business. Margins were hit by
a sharp increase in subscriber acquisition and advertising expenses – Idea indicates a qoq hit of
250 bps on this account. We note that most industry players ran festive season promotions during
the Dec 2010 quarter; increased churn (10.3% in the prepaid segment versus 8.2% in 2QFY11)
also impacted to an extent, in our view. Our channel checks also suggest pressure on trade
channel commissions. Competition can manifest itself in many ways.
Other results highlights
Network rollout was slow, as also reflected in lower-than-guidance capex. Idea added
2,228 cell sites during the quarter, taking the total cell site base to 70,208 at end-Dec
2010.
Idea capitalized a further Rs1.24 bn of interest expenses pertaining to 3G debt. We note
that Idea is yet to launch its 3G services and would continue to capitalize these expenses
for at least a part of 4QFY11E as well. Total 3G-related interest capitalized till date stands
at Rs2.85 bn.
Indus – can’t read much from Idea’s numbers. Idea’s segmental report suggests flat
revenues qoq for Indus with a 360 bps qoq improvement in margins. We note that Idea
reports the impact of the JV to provide a perspective to Idea’s consolidated financials and
indicates that due to differences in accounting treatment, these numbers may not be
representative of financial statements of the JV.
Wireless MOU increased 1.8% qoq to 401 (our expectation was 397) while wireless ARPU
remained steady at 168 (1% ahead of estimate).
Wireless prepaid churn increased sharply to 10.3% (from 8.2% in 2QFY11), higher than
any quarter in the company’s history. This, in addition to higher qoq net adds reported by
Idea (7.6 mn in 3QFY11 versus 5.3 mn in 2QFY11), implies a sharp increase in gross adds
– we estimate gross adds for 3QFY11 at 15.4 mn versus 11 mn in 2QFY11. This leads to
an increase in subscriber acquisition costs, possibly explaining close to 150 bps of the
total 250 bps qoq increase in subs acquisition and ad expenses reported by Idea.
VAS as % of revenues was steady at 13% for the quarter.
Capex, balance sheet – Idea reported a capex of Rs9.5 bn for the quarter taking YTD
FY2011E capex to Rs17.5 bn. The company has revised down its capex guidance for
FY2011E to Rs30 bn from Rs40 bn earlier, attributing the same to delays in roll-out and
unexpected savings. We note that Idea’s CWIP increased by Rs4.4 bn during the quarter.
Consolidated net debt at end-Dec 2010 stood at Rs106.8 bn (same as at end-Sep 2010).
Net debt to EBITDA (on annualized Dec 2010 quarter EBITDA) stands at 2.8X, comfortable
within the ‘new normal’ parameters for the Indian wireless industry.
Even as Idea broadly maintained its EBITDA losses in the new service areas at Rs1.4 bn for
the quarter, EBITDA margins in the established service areas continue to be under
pressure (down 30 bps qoq despite the a strong 7.2% qoq revenue growth). We note
that Idea has been aggressive on pricing in its new circles while holding on to prices (at
premium to new players) in its established circles.
Await earnings call for estimates review; reiterate REDUCE
We shall update our earnings estimates post the company’s 3QFY11 earnings call. Prima
facie, capex spillover into FY2012E will likely lead to an increase in ours and possibly Street’s
EPS estimate for FY2011/12E though we do not see meaningful upside to EBITDA estimates.
Our lower-than-consensus EBITDA estimate for FY2012E demands a 5% EBITDA CQGR from
4QFY11-1QFY12E, while consensus estimates demand 6% – note that this 5-quarter period
includes an expected seasonally weak Sep quarter, and faces challenges from increased 3G
opex (network costs and spectrum charges), and sustained high competitive intensity in the
market (circle-level tariff interventions, MNP, pressure on trade channel payouts, etc.).
Valuations remain stretched at 8.5X FY2012E EV/EBITDA. We retain our REDUCE rating on
the stock.
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