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IDEA Cellular (IDEA.BO)
Upgrade to Buy: Growth at Reasonable Price Now
Sharp fall on regulatory concerns provides attractive entry point — We
upgrade Idea to Buy/Medium Risk (1M) from Sell/Medium Risk (3M). The stock
has fallen ~15% in the last 1 month on the back of concerns related to spectrum
linked cash outgo as well as the DoT withholding 3G spectrum in Punjab (<1% hit
on EBITDA). The stock currently trades at a 5% premium to Bharti (on FY12E
EV/EBITDA) and appears to be factoring in the worst case of regulatory charges,
though the actual policy implementation is likely to be a compromise.
Raising target price to Rs79 (from Rs72) — Our TP for Idea comprises a DCF
value of Rs81/share, 16% Indus stake at Rs15/share and cash outgo from excess
spectrum charges/license renewals at Rs16/share. The target price increase
comes on the back of our 1-6% EBITDA upgrade for FY11-13E on tempering down
of rev/min decline. The DCF value imputes a FY12E EV/EBITDA of 8.9x, at a small
premium to Bharti which we believe is justified given Idea’s higher leverage to
recovery and its likely participation in sector consolidation. On a FY12E P/CEPS
basis, Idea’s DCF imputes a multiple of 7.5x; at a discount to Bharti.
2G controversy: The positives — The ongoing 2G spectrum controversy should
have a positive rub-off for incumbents as it provides a competitive breather. This
along with a plateauing out of multi-SIMs suggests that the peak of competition is
behind, and provides comfort on the rev/min as well as traffic growth assumptions.
Idea has executed well — Idea's execution has been aggressive as well as
measured at the same time, relying on focused rollouts and selective tariff cuts
much more effectively than anyone else. We believe Idea’s selective tariff reaction
has played a key role in its superior traffic growth as it straddles its 2 roles –
incumbent in 11 circles and new entrant in the others, as well as its high ratio of
active subscribers despite new entrant status in 8 new circles. Calibrated roll-out
has also helped dampen the hit on profitability. dampen the hit on profitability.
Upgrade to Buy with Target of Rs79
We raise Idea's FY11-13 EBITDA estimates by 2-6%. Key reason for our
increase is moderation of the rev/min decline. Compared to previous estimates,
we forecast Idea's rev/min decline to be 2 paisa for FY11-12E versus 3 paisa
earlier given lower impact from MNP versus what was previously expected. The
increase at the EPS level is accentuated due to the low base effect.
Idea’s core business value of Rs81/share is based on Mar-11E DCF. The DCF
imputes FY12E EV/EBITDA at 8.9x at a small premium to Bharti (India
business) which we believe is justified given superior growth prospects. Idea's
stake value in Indus continues to be valued at Rs15/share. We reduce the
resultant value by Rs17/share to factor in the excess spectrum charges and
license renewal fees.
Idea Cellular currently lies in the Unattractive quadrant of our Value-Momentum
map with weak momentum and weak value scores. It has been a resident there
since the past 2 months. Compared to its peers in the Telecoms & Media
sector, Idea Cellular fares worse on the valuation metric and on the momentum
metric. Similarly, compared to its peers in its home market of India, Idea
Cellular fares worse on the valuation metric and on the momentum metric.
From a macro perspective, Idea Cellular is likely to benefit from falling EM
yields, and a weaker US Dollar.
IDEA Cellular
Valuation
Our target price of Rs79 is based on (i) core business value at Rs81/share
based on Mar-11 DCF; plus (ii) the Indus stake valued at Rs15/share; minus (iii)
Rs17 cash outgo related to one-time spectrum charges and license renewals
from TRAI recommendations. The DCF is based on a WACC of 11.0%, a
terminal growth rate of 3% and beta of 1.1. We prefer DCF as peak capex
burden is behind us and the company should now start to generate free cash
flows. The DCF implies a FY12E EV/EBITDA value of 8.9x and P/CEPS of
7.5x.
Risks
We assign a Medium Risk rating to IDEA Cellular, as opposed to the Low Risk
assigned by our quant risk rating system as 1) Idea’s already stretched balance
sheet is vulnerable to regulatory payments (high probability) and 2) smaller
scale and new launches mean it is more susceptible to business disruptions.
Downside risks that could impede the stock from reaching our target price
include: 1) Adverse regulations regulated to higher-than-expected regulatory
charges (license fee renewals and excess spectrum charges) are key risks
given relatively small B/S size; 2) Higher-than-expected competition would
impact Idea more than its peers given its smaller scale.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IDEA Cellular (IDEA.BO)
Upgrade to Buy: Growth at Reasonable Price Now
Sharp fall on regulatory concerns provides attractive entry point — We
upgrade Idea to Buy/Medium Risk (1M) from Sell/Medium Risk (3M). The stock
has fallen ~15% in the last 1 month on the back of concerns related to spectrum
linked cash outgo as well as the DoT withholding 3G spectrum in Punjab (<1% hit
on EBITDA). The stock currently trades at a 5% premium to Bharti (on FY12E
EV/EBITDA) and appears to be factoring in the worst case of regulatory charges,
though the actual policy implementation is likely to be a compromise.
Raising target price to Rs79 (from Rs72) — Our TP for Idea comprises a DCF
value of Rs81/share, 16% Indus stake at Rs15/share and cash outgo from excess
spectrum charges/license renewals at Rs16/share. The target price increase
comes on the back of our 1-6% EBITDA upgrade for FY11-13E on tempering down
of rev/min decline. The DCF value imputes a FY12E EV/EBITDA of 8.9x, at a small
premium to Bharti which we believe is justified given Idea’s higher leverage to
recovery and its likely participation in sector consolidation. On a FY12E P/CEPS
basis, Idea’s DCF imputes a multiple of 7.5x; at a discount to Bharti.
2G controversy: The positives — The ongoing 2G spectrum controversy should
have a positive rub-off for incumbents as it provides a competitive breather. This
along with a plateauing out of multi-SIMs suggests that the peak of competition is
behind, and provides comfort on the rev/min as well as traffic growth assumptions.
Idea has executed well — Idea's execution has been aggressive as well as
measured at the same time, relying on focused rollouts and selective tariff cuts
much more effectively than anyone else. We believe Idea’s selective tariff reaction
has played a key role in its superior traffic growth as it straddles its 2 roles –
incumbent in 11 circles and new entrant in the others, as well as its high ratio of
active subscribers despite new entrant status in 8 new circles. Calibrated roll-out
has also helped dampen the hit on profitability. dampen the hit on profitability.
Upgrade to Buy with Target of Rs79
We raise Idea's FY11-13 EBITDA estimates by 2-6%. Key reason for our
increase is moderation of the rev/min decline. Compared to previous estimates,
we forecast Idea's rev/min decline to be 2 paisa for FY11-12E versus 3 paisa
earlier given lower impact from MNP versus what was previously expected. The
increase at the EPS level is accentuated due to the low base effect.
Idea’s core business value of Rs81/share is based on Mar-11E DCF. The DCF
imputes FY12E EV/EBITDA at 8.9x at a small premium to Bharti (India
business) which we believe is justified given superior growth prospects. Idea's
stake value in Indus continues to be valued at Rs15/share. We reduce the
resultant value by Rs17/share to factor in the excess spectrum charges and
license renewal fees.
Idea Cellular currently lies in the Unattractive quadrant of our Value-Momentum
map with weak momentum and weak value scores. It has been a resident there
since the past 2 months. Compared to its peers in the Telecoms & Media
sector, Idea Cellular fares worse on the valuation metric and on the momentum
metric. Similarly, compared to its peers in its home market of India, Idea
Cellular fares worse on the valuation metric and on the momentum metric.
From a macro perspective, Idea Cellular is likely to benefit from falling EM
yields, and a weaker US Dollar.
IDEA Cellular
Valuation
Our target price of Rs79 is based on (i) core business value at Rs81/share
based on Mar-11 DCF; plus (ii) the Indus stake valued at Rs15/share; minus (iii)
Rs17 cash outgo related to one-time spectrum charges and license renewals
from TRAI recommendations. The DCF is based on a WACC of 11.0%, a
terminal growth rate of 3% and beta of 1.1. We prefer DCF as peak capex
burden is behind us and the company should now start to generate free cash
flows. The DCF implies a FY12E EV/EBITDA value of 8.9x and P/CEPS of
7.5x.
Risks
We assign a Medium Risk rating to IDEA Cellular, as opposed to the Low Risk
assigned by our quant risk rating system as 1) Idea’s already stretched balance
sheet is vulnerable to regulatory payments (high probability) and 2) smaller
scale and new launches mean it is more susceptible to business disruptions.
Downside risks that could impede the stock from reaching our target price
include: 1) Adverse regulations regulated to higher-than-expected regulatory
charges (license fee renewals and excess spectrum charges) are key risks
given relatively small B/S size; 2) Higher-than-expected competition would
impact Idea more than its peers given its smaller scale.
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