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IDEA (IDEA)
Telecom
Industry fundamentals remain challenging and valuations rich. REDUCE. We
retain our REDUCE rating and fair value target of Rs55/share on Idea despite 4-7%
upgrade in our revenue estimates for FY2012-13E. Our EBITDA estimate for FY2012E
remains unchanged while that for FY2013E is revised up by 2.5%. Idea’s execution
continues to remain top-notch; however, valuations at 8.5X FY2012E are rich in the
backdrop of sustained pressure on business. We remain Cautious.
Excellent execution and lower capex drives revenue/EPS upgrades
Before we delve into the details of our earnings changes, we note that Idea’s high operating and
financial leverage results in modest changes in EBITDA estimate translating into substantial %
change in EPS estimates – hence, looking at EPS estimate changes or EPS-based relative multiples
may not yield the true picture.
Exhibit 1 gives the key changes to our earnings model for Idea. We have raised our revenue
estimates for FY2012/13E by 3.7/7%, reduced our EBITDA margin estimate by 90/110 bps, leading
to an unchanged EBITDA estimate for FY2012E and a 2.5% upward revision in our EBITDA
estimate for FY2013E. Our EPS estimates stand revised at Rs1.24 for FY2012E and Rs2.58 for
FY2013E.
We note the key drivers of our estimate change – (1) increase in subs base estimate for Idea driven
by increase in market subs forecast (as we need to keep our estimates in line with the sustained
high net adds, however meaningless, reported by the industry) as well as an increase in market
share estimate for Idea, (2) increased subs acquisition and retention costs for the industry in light
of MNP, higher-than-expected churn and pressure on trade channel commissions and (3) lower
capex for FY2011E and phased 3G launch (impacts the timing of spectrum payout amortization
and interest recognition through the P&L).
Rich valuations in the backdrop of still-high competitive intensity keep us Cautious. REDUCE
We retain our REDUCE rating and fair value target of Rs55/share for Idea. The stock trades at 8.5X
FY2012E EV/EBITDA, a substantial premium to Bharti’s 7.3X and also to other EM telcos. We
expect the industry fundamentals to remain stressed for the next few quarters (MNP has just been
launched, selective circle-level tariff interventions continue, churn remains high, and 3G-related
opex is likely to be a margin drag before revenues catch up). In this backdrop, sustained high
valuations of Idea possibly reflect – (1) in-built M&A premium for the stock, and/or (2) Street’s
optimistic view on improvement in India wireless industry structure. Even as factor (1) could
sustain, we see negative surprises on (2). Our target price for Idea values the company at 6.9X
FY2012E EV/EBITDA (core business at 6.5X and Rs15/share contribution from Idea’s 16% stake in
Indus).
Key earnings call highlights
Idea attributed the sharp 250 bps qoq increase in S&M expenses to (1) sharp increase in
gross adds (from 11 mn to 15.4 mn) and (2) increased advertising expenses. Increase in
gross adds reflected Idea’s improved net adds share as well as sharp increase in churn (to
10.3% in the pre-paid segment from 8.2% in 2QFY11).
Idea indicated a Rs150 mn (~40 bps benefit) one-time provision reversal in network
operating costs and a one-time Rs75 mn expense (~20 bps hit) in the other expenses line
item. On balance, one-time items aided Idea’s EBITDA margin by 20 bps in 3QFY11.
Idea management expressed confidence on improvement in industry competitive
structure while calling the timing of the same uncertain. The company expects pace of
RPM decline to continue to fall over the coming quarters.
The company is preparing to launch its 3G network in a phased manner over the coming
few months – note that the company’s 3G launch appears delayed from the earlier
communicated Jan-Mar 2011 timeline. Spectrum fee amortization and interest expensing
on 3G-related debt will be done on a circle-wise launch basis, phasing the impact of these
two items on the P&L over the next 2-3 quarters.
Idea indicated a weak quarter for Indus in terms of revenue growth (growth of just about
2% qoq).
In line with industry peers, Idea views MNP as a non-event. We disagree – even if MNP
turns out to be a zero-sum game in terms of subs share movement, it may not be a zeroimpact
event for the industry.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
IDEA (IDEA)
Telecom
Industry fundamentals remain challenging and valuations rich. REDUCE. We
retain our REDUCE rating and fair value target of Rs55/share on Idea despite 4-7%
upgrade in our revenue estimates for FY2012-13E. Our EBITDA estimate for FY2012E
remains unchanged while that for FY2013E is revised up by 2.5%. Idea’s execution
continues to remain top-notch; however, valuations at 8.5X FY2012E are rich in the
backdrop of sustained pressure on business. We remain Cautious.
Excellent execution and lower capex drives revenue/EPS upgrades
Before we delve into the details of our earnings changes, we note that Idea’s high operating and
financial leverage results in modest changes in EBITDA estimate translating into substantial %
change in EPS estimates – hence, looking at EPS estimate changes or EPS-based relative multiples
may not yield the true picture.
Exhibit 1 gives the key changes to our earnings model for Idea. We have raised our revenue
estimates for FY2012/13E by 3.7/7%, reduced our EBITDA margin estimate by 90/110 bps, leading
to an unchanged EBITDA estimate for FY2012E and a 2.5% upward revision in our EBITDA
estimate for FY2013E. Our EPS estimates stand revised at Rs1.24 for FY2012E and Rs2.58 for
FY2013E.
We note the key drivers of our estimate change – (1) increase in subs base estimate for Idea driven
by increase in market subs forecast (as we need to keep our estimates in line with the sustained
high net adds, however meaningless, reported by the industry) as well as an increase in market
share estimate for Idea, (2) increased subs acquisition and retention costs for the industry in light
of MNP, higher-than-expected churn and pressure on trade channel commissions and (3) lower
capex for FY2011E and phased 3G launch (impacts the timing of spectrum payout amortization
and interest recognition through the P&L).
Rich valuations in the backdrop of still-high competitive intensity keep us Cautious. REDUCE
We retain our REDUCE rating and fair value target of Rs55/share for Idea. The stock trades at 8.5X
FY2012E EV/EBITDA, a substantial premium to Bharti’s 7.3X and also to other EM telcos. We
expect the industry fundamentals to remain stressed for the next few quarters (MNP has just been
launched, selective circle-level tariff interventions continue, churn remains high, and 3G-related
opex is likely to be a margin drag before revenues catch up). In this backdrop, sustained high
valuations of Idea possibly reflect – (1) in-built M&A premium for the stock, and/or (2) Street’s
optimistic view on improvement in India wireless industry structure. Even as factor (1) could
sustain, we see negative surprises on (2). Our target price for Idea values the company at 6.9X
FY2012E EV/EBITDA (core business at 6.5X and Rs15/share contribution from Idea’s 16% stake in
Indus).
Key earnings call highlights
Idea attributed the sharp 250 bps qoq increase in S&M expenses to (1) sharp increase in
gross adds (from 11 mn to 15.4 mn) and (2) increased advertising expenses. Increase in
gross adds reflected Idea’s improved net adds share as well as sharp increase in churn (to
10.3% in the pre-paid segment from 8.2% in 2QFY11).
Idea indicated a Rs150 mn (~40 bps benefit) one-time provision reversal in network
operating costs and a one-time Rs75 mn expense (~20 bps hit) in the other expenses line
item. On balance, one-time items aided Idea’s EBITDA margin by 20 bps in 3QFY11.
Idea management expressed confidence on improvement in industry competitive
structure while calling the timing of the same uncertain. The company expects pace of
RPM decline to continue to fall over the coming quarters.
The company is preparing to launch its 3G network in a phased manner over the coming
few months – note that the company’s 3G launch appears delayed from the earlier
communicated Jan-Mar 2011 timeline. Spectrum fee amortization and interest expensing
on 3G-related debt will be done on a circle-wise launch basis, phasing the impact of these
two items on the P&L over the next 2-3 quarters.
Idea indicated a weak quarter for Indus in terms of revenue growth (growth of just about
2% qoq).
In line with industry peers, Idea views MNP as a non-event. We disagree – even if MNP
turns out to be a zero-sum game in terms of subs share movement, it may not be a zeroimpact
event for the industry.
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