Reduce Idea Cellular – 3QFY2011 Result Update -Angel Broking

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  Idea Cellular – 3QFY2011 Result Update

Angel Broking maintains a Reduce on Idea Cellular with a Target Price of Rs. 64.

Strong operational performance: For 3QFY2011, Idea reported decent set of
numbers with 8.1% revenue growth at `3,956cr (v/s our estimate of `3,844cr),
primarily on the back of increasing minutes of usage (MOU) and robust
subscriber growth. MOU per subscriber increased by 2% qoq to 401mins (v/s our
estimate of 395mins). Average revenue per minute (ARPM) fell marginally by
1.2% qoq to `0.42/min (v/s our estimate of `0.42/min). Net subscriber growth
stood at 10.2% qoq, taking the overall subscriber base to 81.8mn. ARPU
increased by 0.6% qoq to `168 (v/s our estimate of `166).

EBITDA margins sustained: During the quarter, EBITDA margins remained flat at
24% on account of volume-led cost efficiencies, despite the 2.5% increase (as a %
of revenue) in advertising, subscriber acquisition and servicing costs. EBITDA per
minute (EPM) remained flat qoq at `0.10/min. The company’s margins from new
circles improved as compared to established circles.
PAT boosted by lower interest expenses: Much ahead of our expectations, the
company’s PAT grew by 35% to `243cr, up 35% qoq. This was mainly due to
lower interest expenses. Also, interest expenses arising out of the 3G auction fees
payment were capitalised to `124.2cr.
3G rollout on track: In the next few months, Idea would launch its 3G services in
11 service areas. Idea is also finalising long-term arrangements with select quality
operators for areas where it was not awarded the 3G spectrum.
Outlook and valuation: We expect steady revenue growth on the back of
improving KPIs – pressure on ARPM to slow down and MOU growth to moderate.
At the CMP, the stock is trading at EV/EBITDA of 7.9x FY2012, which is on the
higher side compared to sector leader Bharti Airtel, which is trading at EV/EBITDA
of 7.2x FY2012, even with superior KPIs and better balance sheet. We value Idea
at EV/EBITDA of 7.5x FY2012 and maintain Reduce with a Target Price of `64.

Strong operational performance
The mobility segment’s revenue grew by 8.1% qoq to `3,956cr, primarily on the
back of increasing MOU per subscriber and robust subscriber growth. MOU per
subscriber grew by 2% qoq to 401mins on the back of the festive season during
the quarter. Despite cut-throat competition during the quarter, Idea managed to
add 7.5mn subscribers to its network, reporting a 10.2% increase qoq.

During the quarter, voice ARPM declined marginally by 0.5paisa to `0.42/min,
signaling a gradual slowdown in its decline. Overall, higher net additions in
subscriber base along with increasing MOU per subscriber and a marginal decline
in ARPM enabled the ARPU to grow marginally to `168. Over the quarters, Idea
has been improving its VAS share as a percentage of total revenue.
For 3QFY2011, the company managed to again improve its VAS share by
10bp qoq to 13%.

EBITDA margins sustained
During the quarter, EBITDA margins remained flat at 24% on account of
volume-led cost efficiencies, despite the 2.5% increase (as a % of revenue) in
advertising, subscriber acquisition and servicing costs. EPM remained flat qoq at
`0.10/min. The company’s margins from new circles improved as compared to
established circles. Healthy margins of 45.8% from Indus also contributed to
overall margins.

Mobile number portability (MNP) not a game changer
Management has indicated that the implementation of MNP has not affected
incumbent players providing quality services. In fact, these players are proving to
be net gainers in terms of subscriber additions.

Investment arguments
Overall ARPU to remain under pressure
Going forward, we expect MOU to expand at a moderate pace. Voice ARPM is
also expected to stabilise. However, improvement in VAS share will help in
arresting the downfall in overall ARPM. We expect decent subscriber growth rate to
support growth in the mobility segment’s revenue, which is expected to witness a
21% CAGR over FY2010–12.

EBITDA margin to rebound in FY2012
Idea’s EBITDA margin attained a new lower orbit at 24.1% YTD v/s 27.4% in
FY2010 on the back of higher license and spectrum-related charges as well as
increasing roaming and access charges due to the entry of new operators. Going
forward, we expect EBITDA margin to expand primarily due to the expected
network rollout, with the backhaul being the company’s owned sites, which will
result in lower network operating expenditure. Hence, we expect EBITDA margin to
rebound only in FY2012 to 25.7% after slumping to 25.02% in FY2011.
Valuations
At the CMP, the stock is trading at EV/EBITDA of 7.9x FY2012, which is on the
higher side compared to Indian telecom leader Bharti Airtel, which is trading at
EV/EBITDA of 7.2x FY2012, even with superior KPIs and better balance sheet.
The stock has been trading at 5–10x one-year forward EV/EBITDA since the past
one year. We value the stock at EV/EBITDA of 7.5x FY2012E, i.e. average of the
above mentioned band. At current levels, we continue to maintain our Reduce
rating on the stock with a Target Price of `64.