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● The Idea Cellular 4Q FY3/11 earnings call gave the first
indications of the immediacy of the 3G phenomenon in the Indian
telecoms sector. Management was optimistic on various counts.
● From the current 700 town coverage (within two months of
launch), Idea plans to spread to over 4,000 towns by Mar-12,
bringing over half its 2G subscribers under 3G coverage. Until
end-May, over 1.5 mn subscribers had signed up for 3G services
– including a large share of prepaid subscribers.
● In the 700 towns, the company has ~6,500 3G sites already
installed, all of them being stationed in the existing 2G boxes.
Even for future rollout, management explained that most 3G sites
would be deployed in a similar manner. This has serious
implications on capex and opex, and could force a
rethinking/improvement in valuation of 3G businesses by investors
in the coming months.
● We adjust our FY3/12E numbers for higher taxes and depreciation
leading to an 11% cut in our EPS estimate. Future year numbers
and stock fair value are largely unchanged. We maintain our
OUTPERFORM and target price of Rs95.
Bullish comments on 3G
The Idea Cellular 4Q FY3/11 results conference call gave the first
instance of an Indian telco management coming out strongly optimistic
about 3G prospects. We summarise below our key takeaways:
● Idea already has 1.55 mn subscribers signed up for 3G services
by end-May – since the launch started in phases from end-March.
All of these subscribers are revenue generating (i.e., no
subscribers on free 3G trial period). Importantly, the subscriber
pattern for 3G is following the same split as in 2G between
prepaid and postpaid subscribers. This indicates that 3G is
already getting acceptance from prepaid subscribers (although
likely to the higher ARPU prepaid subscribers).
● Idea had launched services in 700 towns across nine circles as of
end-May, the remaining two circles with 3G spectrum will be
launched shortly. The target is to have 50% of 2G subscriber base
under 3G network coverage by the end of Mar-12. This would
translate into a coverage of 4,000-plus towns. The company is
working with other operators to launch services in circles where it
does not have 3G spectrum.
● As of end-May, the company had ~6,500 3G sites (node Bs)
across the 700 towns. To get an idea of the significance of this
number, we note this is 9% of Idea’s nationwide 2G BTS count,
6% of Bharti’s nationwide 2G BTS count and over 25% of Uninor’s
2G BTS number.
● Importantly, ALL of the 3G sites are upgrades on existing 2G sites
(same box upgraded to 3G). This has significant capex and opex
implications, in our view.
● This is clearly in line with our view that Indian operators would
benefit on capex due to late entry into technology. We note that
two-thirds of Idea’s 2G sites were installed in the past three years
– indicating this is a fairly recent network. Management indicated
that even on the future 3G network rollout, most sites would be
upgrades of existing 2G sites.
● On opex, management indicated that since there is negligible
addition of BTS expected, the increase in network opex would
also be negligible. This implies that 3G revenues would come in at
a very high EBITDA margin. While Idea management is yet to give
an indication of 3G incremental ARPUs, we have a sense from
Bharti’s comments of US$3-4 ARPUs from its subscriber base. In
this context, assuming a reasonable incremental EBITDA per
subscriber of Rs100 for Idea, a simple calculation shows that the
EBITDA boost from 3G by signing up just 6.5 mn subscribers
could be sufficient to cover the P&L fixed costs on 3G spectrum
amortisation and interest payment to make 3G PBT neutral. Our
estimates are lower than this. Recall that 1.5 mn-plus customers
are already signed.
● Management also explained that it is working with handset
manufacturers to bring 3G feature phones in the Rs2,000-2,500
range, and smartphones below Rs6,000 over the next six months.
Idea could get into bundled plans with handset purchase bundled
with free usage (mins/data), but there would be no cash subsidy.
● The company is working with content developers to develop local
language content and applications. Thus we are pleased to see
telcos targeting the entire data access supply chain, which we had
studied in our 23 May report (“Indian Telecom Sector: Data … is
here and now !”).
FY12 estimate change; retain OUTPERFORM
After the results and earnings call, We revise down our FY3/12 EPS
estimate by 11% as we build higher depreciation and tax rates; however,
the impact on future year EPS and our fair value is negligible. We
remain confident of Idea’s improving prospects in the 2G business, and
see 3G/data as an opportunity yet to be fully valued by investors in the
sector. We maintain our OUTPERFORM and target price of Rs95.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● The Idea Cellular 4Q FY3/11 earnings call gave the first
indications of the immediacy of the 3G phenomenon in the Indian
telecoms sector. Management was optimistic on various counts.
● From the current 700 town coverage (within two months of
launch), Idea plans to spread to over 4,000 towns by Mar-12,
bringing over half its 2G subscribers under 3G coverage. Until
end-May, over 1.5 mn subscribers had signed up for 3G services
– including a large share of prepaid subscribers.
● In the 700 towns, the company has ~6,500 3G sites already
installed, all of them being stationed in the existing 2G boxes.
Even for future rollout, management explained that most 3G sites
would be deployed in a similar manner. This has serious
implications on capex and opex, and could force a
rethinking/improvement in valuation of 3G businesses by investors
in the coming months.
● We adjust our FY3/12E numbers for higher taxes and depreciation
leading to an 11% cut in our EPS estimate. Future year numbers
and stock fair value are largely unchanged. We maintain our
OUTPERFORM and target price of Rs95.
Bullish comments on 3G
The Idea Cellular 4Q FY3/11 results conference call gave the first
instance of an Indian telco management coming out strongly optimistic
about 3G prospects. We summarise below our key takeaways:
● Idea already has 1.55 mn subscribers signed up for 3G services
by end-May – since the launch started in phases from end-March.
All of these subscribers are revenue generating (i.e., no
subscribers on free 3G trial period). Importantly, the subscriber
pattern for 3G is following the same split as in 2G between
prepaid and postpaid subscribers. This indicates that 3G is
already getting acceptance from prepaid subscribers (although
likely to the higher ARPU prepaid subscribers).
● Idea had launched services in 700 towns across nine circles as of
end-May, the remaining two circles with 3G spectrum will be
launched shortly. The target is to have 50% of 2G subscriber base
under 3G network coverage by the end of Mar-12. This would
translate into a coverage of 4,000-plus towns. The company is
working with other operators to launch services in circles where it
does not have 3G spectrum.
● As of end-May, the company had ~6,500 3G sites (node Bs)
across the 700 towns. To get an idea of the significance of this
number, we note this is 9% of Idea’s nationwide 2G BTS count,
6% of Bharti’s nationwide 2G BTS count and over 25% of Uninor’s
2G BTS number.
● Importantly, ALL of the 3G sites are upgrades on existing 2G sites
(same box upgraded to 3G). This has significant capex and opex
implications, in our view.
● This is clearly in line with our view that Indian operators would
benefit on capex due to late entry into technology. We note that
two-thirds of Idea’s 2G sites were installed in the past three years
– indicating this is a fairly recent network. Management indicated
that even on the future 3G network rollout, most sites would be
upgrades of existing 2G sites.
● On opex, management indicated that since there is negligible
addition of BTS expected, the increase in network opex would
also be negligible. This implies that 3G revenues would come in at
a very high EBITDA margin. While Idea management is yet to give
an indication of 3G incremental ARPUs, we have a sense from
Bharti’s comments of US$3-4 ARPUs from its subscriber base. In
this context, assuming a reasonable incremental EBITDA per
subscriber of Rs100 for Idea, a simple calculation shows that the
EBITDA boost from 3G by signing up just 6.5 mn subscribers
could be sufficient to cover the P&L fixed costs on 3G spectrum
amortisation and interest payment to make 3G PBT neutral. Our
estimates are lower than this. Recall that 1.5 mn-plus customers
are already signed.
● Management also explained that it is working with handset
manufacturers to bring 3G feature phones in the Rs2,000-2,500
range, and smartphones below Rs6,000 over the next six months.
Idea could get into bundled plans with handset purchase bundled
with free usage (mins/data), but there would be no cash subsidy.
● The company is working with content developers to develop local
language content and applications. Thus we are pleased to see
telcos targeting the entire data access supply chain, which we had
studied in our 23 May report (“Indian Telecom Sector: Data … is
here and now !”).
FY12 estimate change; retain OUTPERFORM
After the results and earnings call, We revise down our FY3/12 EPS
estimate by 11% as we build higher depreciation and tax rates; however,
the impact on future year EPS and our fair value is negligible. We
remain confident of Idea’s improving prospects in the 2G business, and
see 3G/data as an opportunity yet to be fully valued by investors in the
sector. We maintain our OUTPERFORM and target price of Rs95.
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