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Idea Cellular Ltd.
F4Q11 Results Showcase
Highest Leverage to Wireless
Idea reported better than expected F4Q11 results
both at the top-line and EBITDA level: This took place
in a relatively stable pricing environment, depicting its
high leverage to the wireless segment. Overall revenues
grew 26% YoY and 7% QoQ; while absolute EBITDA
grew 16% YoY and 13% QoQ. EBITDA margins
expanded 142bps QoQ to 25.4%, vs. our expectations
of marginal decline, but were down 220bps on a YoY
basis. Profits grew 3% YoY and 13% QoQ.
Overall revenue and EBITDA were 2% and 9% above
our expectations respectively due to higher traffic,
coupled with overall reduction in operating expenses.
Profits were 12% ahead of expectations.
Key Positives:
1) Traffic grew 9% QoQ and 49% YoY to 102bn
minutes. The company carried an additional 8.5bn
minutes for the quarter, similar to F3Q11. Bharti
carried an additional 12.7bn minutes for F4Q11, 6%
QoQ growth (albeit on a higher base).
2) Margins in the established 11 circles expanded
115bps to 27.9% vs. our estimate of 26.2%. Losses
in the remaining new circles fell from Rs1.4bn in
F3Q11 to Rs1.2bn this quarter. We had expected
the losses to be maintained at ~Rs1.4bn levels.
Key Negative:
1) Effective tax rate rose to 17.5% during the quarter,
up from the nine-month average of 6%. Assuming
this average for the quarter, profit growth would
have been >25% QoQ. We estimate effective tax
rate of 20% in our forecasts for F2012.
What does this do to our earnings outlook? We see
upside risk to our F2012 numbers, but await the
earnings conference call and maintain our Overweight
rating and estimates for the company currently.
Wireless operational parameters: In line with our estimates,
ARPMs declined by 3.2% QoQ to Rs0.406/min, while MOUs
fell 1% to 397/sub/month. This led an ARPU decline of 4% to
Rs161/month.
Capex: Idea spent Rs31bn in F2011, almost half of which
came in F4Q11. The management has guided toward capex of
Rs40bn for F2012.
Valuation Methodology
Our 12-month target price for Idea is Rs82/share. It is based on
our DCF model and the value we attribute to the company’s
towers. Our sum-of-the-parts valuation is shown in Exhibit 3.
Our core business value for Idea remains the midpoint of the
value derived from our DCF calculation on a one-year forward
basis, assuming a terminal growth rate of 3% and cost of
capital of 12%, as shown in Exhibit 4. Based on our revised
estimates, we arrive at our new core business enterprise value
of Rs88/share. The company’s net debt equates to Rs36/share.
However, since in our base case we do not include any
revenue upside due to 3G, we add back the book value of the
3G license to the net debt for the company. This equates to
Rs17/share.
We value Idea’s towers in Indus using DCF and use an
EV/tower of 100k to value the company’s directly owned towers.
The combined value for Idea’s towers is US$2.2bn or
Rs30/share. We add this tower value to our core business
equity value (Exhibit 3).
We also incorporate regulatory payouts for excess spectrum
beyond 6.2MHz and cost of renewal of total spectrum on expiry
of licenses. These amount to US$322mn or Rs4 per share and
US$862mn or Rs12 per share respectively.
Exhibit 3
Idea Cellular: Sum of the Parts Valuation
Core Business Enterprise Value 88
Net Debt 19
Core Business Equity Value 68
Tower Valuation 30
Regulatory Payouts (16)
Target Price 82
Source: Company data, Morgan Stanley Research
Exhibit 4
Idea Cellular: Cost of Capital Assumptions
Risk Free Return (Rf) 8.0%
Market Premium (Rm) 6.0%
Assumed Beta 0.98
Cost of Equity (Re) 13.9%
Equity (%) 60.0%
Cost of Debt (Rd) 12.0%
Tax rate 22.5%
After-tax cost of debt (Rd [1-t]) 9.3%
Debt (%) 40.0%
WACC 12.0%
Assumed WACC 12.0%
Source: Company data, Morgan Stanley Research
Company Description
Idea Cellular is part of the Aditya Birla Group. It provides
pan-India wireless telecom services and also has a national
long-distance license. Idea Cellular is the fifth-largest wireless
operator in India. It had over 89mn subscribers as of March 2011
India Telecommunications
Industry View: Attractive
Downside risks to our price target
• Greater-than-expected fall in tariffs due to aggressive
pricing from new operators to gain subscribers.
• Regulatory uncertainty regarding spectrum and Idea’s
need to pay additional spectrum charges.
Catalysts
The recent entry of players such as Sistema and Telenor to the
Indian market as well as the auction of 3G has highlighted the
scarcity value of Indian spectrum. As the smallest of the listed,
pan-Indian wireless players, with one of the largest spectrums
in the country, Idea might offer strategic value in any future
industry consolidation – a prominent industry theme that has
been discussed widely in numerous leading news media
outlets. (Please see “Consolidation in the sector: Telcos seek
M&A-friendly policy,” The Financial Express, 17 January 2011;
and “Government to redraw M&A rules in new telecom policy,”
Business Standard, 2 January 2011.)
• Lower-than-expected losses in new circles could improve
EBITDA margins.
• License fee reduction for the industry as a whole.
• Having higher spectrum relative to its subscriber base,
leading to future reduction in capex.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Idea Cellular Ltd.
F4Q11 Results Showcase
Highest Leverage to Wireless
Idea reported better than expected F4Q11 results
both at the top-line and EBITDA level: This took place
in a relatively stable pricing environment, depicting its
high leverage to the wireless segment. Overall revenues
grew 26% YoY and 7% QoQ; while absolute EBITDA
grew 16% YoY and 13% QoQ. EBITDA margins
expanded 142bps QoQ to 25.4%, vs. our expectations
of marginal decline, but were down 220bps on a YoY
basis. Profits grew 3% YoY and 13% QoQ.
Overall revenue and EBITDA were 2% and 9% above
our expectations respectively due to higher traffic,
coupled with overall reduction in operating expenses.
Profits were 12% ahead of expectations.
Key Positives:
1) Traffic grew 9% QoQ and 49% YoY to 102bn
minutes. The company carried an additional 8.5bn
minutes for the quarter, similar to F3Q11. Bharti
carried an additional 12.7bn minutes for F4Q11, 6%
QoQ growth (albeit on a higher base).
2) Margins in the established 11 circles expanded
115bps to 27.9% vs. our estimate of 26.2%. Losses
in the remaining new circles fell from Rs1.4bn in
F3Q11 to Rs1.2bn this quarter. We had expected
the losses to be maintained at ~Rs1.4bn levels.
Key Negative:
1) Effective tax rate rose to 17.5% during the quarter,
up from the nine-month average of 6%. Assuming
this average for the quarter, profit growth would
have been >25% QoQ. We estimate effective tax
rate of 20% in our forecasts for F2012.
What does this do to our earnings outlook? We see
upside risk to our F2012 numbers, but await the
earnings conference call and maintain our Overweight
rating and estimates for the company currently.
Wireless operational parameters: In line with our estimates,
ARPMs declined by 3.2% QoQ to Rs0.406/min, while MOUs
fell 1% to 397/sub/month. This led an ARPU decline of 4% to
Rs161/month.
Capex: Idea spent Rs31bn in F2011, almost half of which
came in F4Q11. The management has guided toward capex of
Rs40bn for F2012.
Valuation Methodology
Our 12-month target price for Idea is Rs82/share. It is based on
our DCF model and the value we attribute to the company’s
towers. Our sum-of-the-parts valuation is shown in Exhibit 3.
Our core business value for Idea remains the midpoint of the
value derived from our DCF calculation on a one-year forward
basis, assuming a terminal growth rate of 3% and cost of
capital of 12%, as shown in Exhibit 4. Based on our revised
estimates, we arrive at our new core business enterprise value
of Rs88/share. The company’s net debt equates to Rs36/share.
However, since in our base case we do not include any
revenue upside due to 3G, we add back the book value of the
3G license to the net debt for the company. This equates to
Rs17/share.
We value Idea’s towers in Indus using DCF and use an
EV/tower of 100k to value the company’s directly owned towers.
The combined value for Idea’s towers is US$2.2bn or
Rs30/share. We add this tower value to our core business
equity value (Exhibit 3).
We also incorporate regulatory payouts for excess spectrum
beyond 6.2MHz and cost of renewal of total spectrum on expiry
of licenses. These amount to US$322mn or Rs4 per share and
US$862mn or Rs12 per share respectively.
Exhibit 3
Idea Cellular: Sum of the Parts Valuation
Core Business Enterprise Value 88
Net Debt 19
Core Business Equity Value 68
Tower Valuation 30
Regulatory Payouts (16)
Target Price 82
Source: Company data, Morgan Stanley Research
Exhibit 4
Idea Cellular: Cost of Capital Assumptions
Risk Free Return (Rf) 8.0%
Market Premium (Rm) 6.0%
Assumed Beta 0.98
Cost of Equity (Re) 13.9%
Equity (%) 60.0%
Cost of Debt (Rd) 12.0%
Tax rate 22.5%
After-tax cost of debt (Rd [1-t]) 9.3%
Debt (%) 40.0%
WACC 12.0%
Assumed WACC 12.0%
Source: Company data, Morgan Stanley Research
Company Description
Idea Cellular is part of the Aditya Birla Group. It provides
pan-India wireless telecom services and also has a national
long-distance license. Idea Cellular is the fifth-largest wireless
operator in India. It had over 89mn subscribers as of March 2011
India Telecommunications
Industry View: Attractive
Downside risks to our price target
• Greater-than-expected fall in tariffs due to aggressive
pricing from new operators to gain subscribers.
• Regulatory uncertainty regarding spectrum and Idea’s
need to pay additional spectrum charges.
Catalysts
The recent entry of players such as Sistema and Telenor to the
Indian market as well as the auction of 3G has highlighted the
scarcity value of Indian spectrum. As the smallest of the listed,
pan-Indian wireless players, with one of the largest spectrums
in the country, Idea might offer strategic value in any future
industry consolidation – a prominent industry theme that has
been discussed widely in numerous leading news media
outlets. (Please see “Consolidation in the sector: Telcos seek
M&A-friendly policy,” The Financial Express, 17 January 2011;
and “Government to redraw M&A rules in new telecom policy,”
Business Standard, 2 January 2011.)
• Lower-than-expected losses in new circles could improve
EBITDA margins.
• License fee reduction for the industry as a whole.
• Having higher spectrum relative to its subscriber base,
leading to future reduction in capex.
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