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Idea Cellular (IDEA)
Even though Idea Cellular benefits from improvement in revenue
per minute, TRAI recommendations raise concern for the stock
Improvement in regulatory environment and higher possibility of
sector consolidation provide downside support for the stock
Retain Neutral (V) rating and lower our TP to INR72 (from INR75)
Investment summary
We believe Idea is the best positioned second tier
operator in India with excellent spectrum, solid
management team, and a good execution track
record on its national rollout. It is one of the
leading pure play wireless operators (given
Bharti’s exposure to Africa) in India with a
subscriber base of c72m, customer market share
(CMS) of c11% and revenue market share (RMS)
of c13%. The company has been able to increase
its RMS through FY10, despite strong competitive
headwinds. Idea has spectrum in the good quality
900 MHz band in 9 circles, and is amongst the top
three RMS players in eight of these nine markets
Rural subscribers comprise 49% of Idea’s rural subs,
the highest amongst all telecom operators in India.
With urban penetration of 120%, telcos are likely to
focus on rural areas to drive growth and Idea is well
positioned to capture this opportunity. However, the
rural exposure could impact its revenues in the near
term given inflation concerns.
Market speculation about consolidation has been
the key catalyst for the stock. As the consolidation
theme should continue to play out in the India
wireless space, this should provide downside
support for Idea’s share price.
While the company should benefit from
improvement in voice realizations, it is most
vulnerable to the recommendations from TRAI.
Further, the 2G scam probe may delay any
meaningful consolidation in the near to medium
term and this may impact the M&A premium
enjoyed by the stock and as such limit upside.
Revenue per minute and
wireless margin assumptions
As observed in the case of Bharti, revenue per
minute (rpm) for Idea has also declined by 30%
since March 2009. There has been some stability
over the past two quarters with revenue per
minute declining only by c4%, somewhat higher
than Bharti. Given that MNP is in play across
India, we expect marginal pressures to remain and
as such estimate FY12e rpm at INR0.41. That
said, we expect the company’s efforts to boost
revenue per minute to take effect towards the last
two quarters of FY12e and gain momentum by
FY13e. We expect rpm to improve by c5% in
FY13e and reach INR0.46 by FY15e, an absolute
improvement of c13% from present levels.
However, we expect subscriber growth to slow for
Idea Cellular in FY12e and estimate average
monthly net additions at 1.7m per month versus
2.5m per month. As suggested earlier, we forecast
MOU per subscriber per month to come down
from 401 at present to 374 by FY15e, an absolute
decline of c9%. However, we estimate traffic
growth to be healthy at c32% in FY12 and 12% in
FY13e. We are now assuming a declining usage
pattern and muted subscriber growth alongside
improvement in voice tariffs.
Estimate changes
On the basis of the above developments, we raise
our FY13e revenue by c3%. We cut our FY12e
and FY13e earnings by c3% and 2% as we raise
our depreciation estimates marginally by 2% each
on the back of 3G launch.
Valuation & risks
We retain our Neutral (V) rating on the stock, but
cut our target price from INR75 to INR72. While
our core valuation for the India business has
increased after modelling improvement in price
yields, we have cut our target price by c4% as we
adjust for the possible impact of TRAI
recommendations (see Figure 34). However, we
note that we see very limited chance of these
recommendations being accepted in the
present format.
We are rolling our valuation forward from FY12e
to FY13e, in line with our valuation methodology
with respect to other Indian stocks. We believe
FY12e will be a year of consolidation for both
voice and data. With 3G launch to gain traction in
the next 9-12 months and focus on voice
improvements more visible in FY13e, we believe
investors can now shift their focus to FY13e.
We value the core business of Idea Cellular using
a mix of PE and DCF. For our DCF analysis, we
assume cost of equity of 12%, cost of debt 10%,
target debt-to-equity ratio of 25% and WACC of
12% to arrive at a value of INR74. For our PE
analysis, we use a multiple of 20x applied to our
FY13e standalone EPS (INR3.60) and arrive at a
value of INR60. Assigning equal weights to both
PE and DCF we arrive at fair value of INR67 for
the India business.
We value Idea’s investments in the Indus tower
business at INR20 per share using DCF, assuming
a sliding WACC of 11% and terminal growth rate
of c3%. We have adjusted our target price down
by INR15 for the impact of TRAI
recommendations, even though we doubt they will
be accepted in the current format.
For volatile Indian stocks, our Neutral rating band
is 10 percentage points around a hurdle rate of
11%, or 1-21% potential return. Our target price
of INR72 implies a potential return of 10.3%, thus
we maintain our Neutral (V) rating. Our new
target implies PE of 29x on FY12e EPS and 20x
on FY13e EPS. The stock is currently trading at
c19x on our FY13e estimates. Our numbers for
FY12e are 2% above consensus and 8% below
consensus for FY13e estimates.
Key upside risks include sector consolidation and
ability to monetise tower assets. Downside risks
include a slower-than-estimated pick-up in 3G
and a sharp decline in revenue per minute.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Idea Cellular (IDEA)
Even though Idea Cellular benefits from improvement in revenue
per minute, TRAI recommendations raise concern for the stock
Improvement in regulatory environment and higher possibility of
sector consolidation provide downside support for the stock
Retain Neutral (V) rating and lower our TP to INR72 (from INR75)
Investment summary
We believe Idea is the best positioned second tier
operator in India with excellent spectrum, solid
management team, and a good execution track
record on its national rollout. It is one of the
leading pure play wireless operators (given
Bharti’s exposure to Africa) in India with a
subscriber base of c72m, customer market share
(CMS) of c11% and revenue market share (RMS)
of c13%. The company has been able to increase
its RMS through FY10, despite strong competitive
headwinds. Idea has spectrum in the good quality
900 MHz band in 9 circles, and is amongst the top
three RMS players in eight of these nine markets
Rural subscribers comprise 49% of Idea’s rural subs,
the highest amongst all telecom operators in India.
With urban penetration of 120%, telcos are likely to
focus on rural areas to drive growth and Idea is well
positioned to capture this opportunity. However, the
rural exposure could impact its revenues in the near
term given inflation concerns.
Market speculation about consolidation has been
the key catalyst for the stock. As the consolidation
theme should continue to play out in the India
wireless space, this should provide downside
support for Idea’s share price.
While the company should benefit from
improvement in voice realizations, it is most
vulnerable to the recommendations from TRAI.
Further, the 2G scam probe may delay any
meaningful consolidation in the near to medium
term and this may impact the M&A premium
enjoyed by the stock and as such limit upside.
Revenue per minute and
wireless margin assumptions
As observed in the case of Bharti, revenue per
minute (rpm) for Idea has also declined by 30%
since March 2009. There has been some stability
over the past two quarters with revenue per
minute declining only by c4%, somewhat higher
than Bharti. Given that MNP is in play across
India, we expect marginal pressures to remain and
as such estimate FY12e rpm at INR0.41. That
said, we expect the company’s efforts to boost
revenue per minute to take effect towards the last
two quarters of FY12e and gain momentum by
FY13e. We expect rpm to improve by c5% in
FY13e and reach INR0.46 by FY15e, an absolute
improvement of c13% from present levels.
However, we expect subscriber growth to slow for
Idea Cellular in FY12e and estimate average
monthly net additions at 1.7m per month versus
2.5m per month. As suggested earlier, we forecast
MOU per subscriber per month to come down
from 401 at present to 374 by FY15e, an absolute
decline of c9%. However, we estimate traffic
growth to be healthy at c32% in FY12 and 12% in
FY13e. We are now assuming a declining usage
pattern and muted subscriber growth alongside
improvement in voice tariffs.
Estimate changes
On the basis of the above developments, we raise
our FY13e revenue by c3%. We cut our FY12e
and FY13e earnings by c3% and 2% as we raise
our depreciation estimates marginally by 2% each
on the back of 3G launch.
Valuation & risks
We retain our Neutral (V) rating on the stock, but
cut our target price from INR75 to INR72. While
our core valuation for the India business has
increased after modelling improvement in price
yields, we have cut our target price by c4% as we
adjust for the possible impact of TRAI
recommendations (see Figure 34). However, we
note that we see very limited chance of these
recommendations being accepted in the
present format.
We are rolling our valuation forward from FY12e
to FY13e, in line with our valuation methodology
with respect to other Indian stocks. We believe
FY12e will be a year of consolidation for both
voice and data. With 3G launch to gain traction in
the next 9-12 months and focus on voice
improvements more visible in FY13e, we believe
investors can now shift their focus to FY13e.
We value the core business of Idea Cellular using
a mix of PE and DCF. For our DCF analysis, we
assume cost of equity of 12%, cost of debt 10%,
target debt-to-equity ratio of 25% and WACC of
12% to arrive at a value of INR74. For our PE
analysis, we use a multiple of 20x applied to our
FY13e standalone EPS (INR3.60) and arrive at a
value of INR60. Assigning equal weights to both
PE and DCF we arrive at fair value of INR67 for
the India business.
We value Idea’s investments in the Indus tower
business at INR20 per share using DCF, assuming
a sliding WACC of 11% and terminal growth rate
of c3%. We have adjusted our target price down
by INR15 for the impact of TRAI
recommendations, even though we doubt they will
be accepted in the current format.
For volatile Indian stocks, our Neutral rating band
is 10 percentage points around a hurdle rate of
11%, or 1-21% potential return. Our target price
of INR72 implies a potential return of 10.3%, thus
we maintain our Neutral (V) rating. Our new
target implies PE of 29x on FY12e EPS and 20x
on FY13e EPS. The stock is currently trading at
c19x on our FY13e estimates. Our numbers for
FY12e are 2% above consensus and 8% below
consensus for FY13e estimates.
Key upside risks include sector consolidation and
ability to monetise tower assets. Downside risks
include a slower-than-estimated pick-up in 3G
and a sharp decline in revenue per minute.
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