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Idea Cellular Ltd.
Modest outlook and rich valuations
Modest profits & regulatory risk at rich valuations
We forecast Idea’s earnings to stay flattish over next 2 years as better than peers
2G revenue growth will likely be dragged by 3G-related costs and margin
pressures. Idea’s 3G licence footprint has low revenue exposure to relatively rich
metro & category-A circles; this may imply slow 3G revenue scale-up. We also
worry about Idea’s financial ability to withstand potential regulatory shocks. These
factors coupled with +50% valuation premium vs GEM telecom majors
overshadow Idea’s potential M&A attractiveness; maintain Underperform.
Recent revenue share trends may trigger fresh competition
The regulator’s (TRAI) wireless revenue data for 4Q FY11 indicates that Idea
clocked the strongest YoY improvement in revenue market share (+100bps)
among leading wireless operators in India, while Reliance Com (-170bps) & Bharti
(-130bps) were major losers. We expect Bharti to respond via increased
aggression in the market place going forward. For FY12E, we do not foresee any
directional change in the industry’s declining revenue per minute trend.
FY12-13 EBITDA trimmed; DCF intact on lower capex
We have trimmed EBITDA forecasts for Idea by 2% for FY12 & 8% for FY13 due
to lower margins in line with 4Q levels. Earnings cut for FY12 is steeper at 9%
owing to 3G interest & amortization (except for Punjab circle). Despite lower
profits, our DCF-based PO stays unchanged at Rs65/sh due to lower capex outgo
Mgt call highlights still intense competition & deep 3G plans
On its post-results call, Idea said that its high monthly subscriber churn (~10.7%)
reflects continued overcapacity in the sector. Idea aims to rollout 3G services in
3200 towns by end-FY12 vs 700 towns covered by end-May ‘11. Note, Idea
appears to be the only listed telco in India with YoY rise in FY12E capex guidance
Management call highlights
Competition remains intense: Idea said that competition from economically
challenged operators has moderated but overcapacity in the sector remains high.
Consequently, the sector continues to witness pricing pressure and high
subscriber churn.
Deep 3G rollout on the anvil: Idea started rolling out 3G services from end-
March ‘11 onwards. The Co offers 3G services in 700 towns across 9 (out of 11)
licenced service areas as of May ’11 and aims to be present in 3200 towns
across its licenced footprint by end-FY12.
Early days for 3G user behavior: Idea has garnered ~1.55mn 3G users in 2-
months since launch. The numbers are still small (~2% of sub base) and Idea
said it is still early to discuss usage or revenue trends for 3G. On a bullish note,
however, Idea indicated that 3G users drive 40% of data traffic for the company in
markets where 3G is already rolled out.
Focus is on cash profit and leverage levels; 3G amortization & interest
to kick-in: Pending 3G rollout, Idea’s FY11 results were mostly unaffected by 3G
related costs especially interest and amortization. A full-blown 3G launch will
result in ~Rs1.2bn interest charge and ~Rs3bn amortization charge on an
annualized basis. However, Idea said management focus is on cash profits and
net-debt/EBITDA (implying 3G accounting is not a major concern per se). We
forecast Idea’s cash profit CAGR at ~18% over FY11A-13E and net debt/EBITDA
at 2.2x FY13E.
Handset bundling underway; no major subsidies yet: Idea said it is working
closely with vendors to bring down device prices and is looking at handset
bundling options without necessarily offering cash subsidies. The Co expects 3G
device prices to fall sharply over next 6 months.
Drop in VAS revenues reflects restructuring of product suite: Idea said its
non-voice revenue fell 100bps QoQ in 4Q FY11 as the product portfolio is being
corrected and upgraded.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Idea Cellular Ltd.
Modest outlook and rich valuations
Modest profits & regulatory risk at rich valuations
We forecast Idea’s earnings to stay flattish over next 2 years as better than peers
2G revenue growth will likely be dragged by 3G-related costs and margin
pressures. Idea’s 3G licence footprint has low revenue exposure to relatively rich
metro & category-A circles; this may imply slow 3G revenue scale-up. We also
worry about Idea’s financial ability to withstand potential regulatory shocks. These
factors coupled with +50% valuation premium vs GEM telecom majors
overshadow Idea’s potential M&A attractiveness; maintain Underperform.
Recent revenue share trends may trigger fresh competition
The regulator’s (TRAI) wireless revenue data for 4Q FY11 indicates that Idea
clocked the strongest YoY improvement in revenue market share (+100bps)
among leading wireless operators in India, while Reliance Com (-170bps) & Bharti
(-130bps) were major losers. We expect Bharti to respond via increased
aggression in the market place going forward. For FY12E, we do not foresee any
directional change in the industry’s declining revenue per minute trend.
FY12-13 EBITDA trimmed; DCF intact on lower capex
We have trimmed EBITDA forecasts for Idea by 2% for FY12 & 8% for FY13 due
to lower margins in line with 4Q levels. Earnings cut for FY12 is steeper at 9%
owing to 3G interest & amortization (except for Punjab circle). Despite lower
profits, our DCF-based PO stays unchanged at Rs65/sh due to lower capex outgo
Mgt call highlights still intense competition & deep 3G plans
On its post-results call, Idea said that its high monthly subscriber churn (~10.7%)
reflects continued overcapacity in the sector. Idea aims to rollout 3G services in
3200 towns by end-FY12 vs 700 towns covered by end-May ‘11. Note, Idea
appears to be the only listed telco in India with YoY rise in FY12E capex guidance
Management call highlights
Competition remains intense: Idea said that competition from economically
challenged operators has moderated but overcapacity in the sector remains high.
Consequently, the sector continues to witness pricing pressure and high
subscriber churn.
Deep 3G rollout on the anvil: Idea started rolling out 3G services from end-
March ‘11 onwards. The Co offers 3G services in 700 towns across 9 (out of 11)
licenced service areas as of May ’11 and aims to be present in 3200 towns
across its licenced footprint by end-FY12.
Early days for 3G user behavior: Idea has garnered ~1.55mn 3G users in 2-
months since launch. The numbers are still small (~2% of sub base) and Idea
said it is still early to discuss usage or revenue trends for 3G. On a bullish note,
however, Idea indicated that 3G users drive 40% of data traffic for the company in
markets where 3G is already rolled out.
Focus is on cash profit and leverage levels; 3G amortization & interest
to kick-in: Pending 3G rollout, Idea’s FY11 results were mostly unaffected by 3G
related costs especially interest and amortization. A full-blown 3G launch will
result in ~Rs1.2bn interest charge and ~Rs3bn amortization charge on an
annualized basis. However, Idea said management focus is on cash profits and
net-debt/EBITDA (implying 3G accounting is not a major concern per se). We
forecast Idea’s cash profit CAGR at ~18% over FY11A-13E and net debt/EBITDA
at 2.2x FY13E.
Handset bundling underway; no major subsidies yet: Idea said it is working
closely with vendors to bring down device prices and is looking at handset
bundling options without necessarily offering cash subsidies. The Co expects 3G
device prices to fall sharply over next 6 months.
Drop in VAS revenues reflects restructuring of product suite: Idea said its
non-voice revenue fell 100bps QoQ in 4Q FY11 as the product portfolio is being
corrected and upgraded.
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