Idea Cellular - Decent results Macquarie Research,

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Idea Cellular
Decent results
Event
 Idea delivered decent headline results in 4QFY11 and while we acknowledge
the encouraging performance on some operating metrics, we see no reason
to get excited and make only minor changes to our forecasts and target price.
Our outlook on cash flows and triggers remains broadly unchanged. We
therefore maintain our Underperform rating.
Impact
 Good headline results: 4QFY11 sales came in around 1% ahead of the
street and our estimates. Unlike its peers (read: Bharti), this flowed down to
the bottom line since there was no major impact from the interest and
amortisation costs related to the 3G roll out. PAT came in 4% ahead of our
estimate and 12% above consensus (we were 7% ahead of the street).
 Mixed metrics… mostly positive: Sales was driven by an impressive 9%
growth in MOU. This was more than enough to offset the impact of a 3%
(1.2p) decline in ARPM, which was below our expectation of a 0.8p decline.
While overall churn was high at 10.7%, this metric was below 3% for post paid
subscribers. This is encouraging given MNP implementation from January
2011 and Idea has emerged as the second highest gainer. Loss from 9 new
circles declined 15% QoQ, but benefited from a one off cost write back.
 Headline numbers from 1QFY12 will be weaker: As mentioned above, the
3G impact was not realized in the current quarter. The impact of the rollout will
be felt below the EBITDA line in upcoming quarters in the form of higher
interest and D&A expenses.
Earnings and target price revision
 Our revenue forecasts are broadly unchanged, with minor adjustments to the
3G rollout schedule and MOU. Our earnings estimates from FY12 onwards
and target price see only minor upgrades of 3–5% (revised TP is Rs52;
previous TP was Rs49).
Price catalyst
 12-month price target: Rs52.00 based on a Sum of Parts methodology.
 Catalyst: Progress on operating metrics (ARPM/ MOU/ 3G), news flow on 2G
controversy, regulatory payments and new telecom policy (M&A rules).
Action and recommendation
 Maintain Underperform rating: Idea has delivered a decent quarter in
4QFY11. Performance on some operating metrics (such as MOU and post
paid churn) was encouraging but within our comfort zone.
 Idea is a pure play in the sector with a strong business model and operations.
At some stage, we believe Idea will be an interesting play on the sector. At
this time, however, it is trading at a premium to industry peers driven by M&A
expectations. We think this is unlikely to materialise in the next two quarters (if
at all). We wait for clarity on the telecom policy (notably M&A rules) and the
valuation premium to shrink before we reconsider our position.