Idea Cellular- Q4FY'11 first take: strong margins steal the show

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Idea Cellular Limited
Underweight
IDEA.BO, IDEA IN
Q4FY'11 first take: strong margins steal the show


Idea  reported a strong set  of Q4  results, with 7% Q/Q  revenue  growth and a
1.4pp  margin  increase. The  revenue  growth  was  volume  driven  as  pricing
decline accelerated in the quarter while the margin improvement was a result
of lower network opex. We expect a positive market reaction to Q4 numbers
but we also highlight our concerns of increased network opex in FY12, higher
3G-related D&A and interest expenses, and also the regulatory overhang.
 Volumes  strong,  pricing  decline  accelerated: Total  minutes  carried  on
Idea’s network increased 9.0% Q/Q (JPMe +8.4%) vs. 10.2% in Q3. Bharti
in Q4 saw +6.4% and Vodafone saw +7.8% growth.  Idea’s minute  growth
was driven by the 9.4% growth in the sub base as MOUs declined 1% Q/Q
to  397.  ARPM  decline  by  1.2 paisa/2.9% (JPMe  -1.1%) to  40.6 paisa vs.
1.2% in Q3. Bharti’s ARPM  declined  2.3%, while we  believe  Vodafone’s
ARPM declined 2.6% Q/Q. ARPU at INR161 declined 4% Q/Q. Churn rate
was 10.7% in Q4, a 70bp increase after increasing 2pp in Q3.
 Standalone  revenue  (excl.  Indus)  was  INR  42.7bn  in  Q4  (+7%  Q/Q),
1.6%  above JPMe  of  INR  42.0  bn. Standalone  EBITDA  margin  was
22.2% a 1.7pp Q/Q increase and 2.7pp above JPMe. We note that margins in
Idea’s  established  circles  improved  1.2pp  to  27.9%  and  in  its  new  circles
improved 8.2pp to -26.7%. After four consecutive quarters of stable absolute
EBITDA loss in its new circles of ~INR1.4bn, loss reduced to INR 1.2bn.
 Consolidated revenue of INR 42.35bn (+7.1% Q/Q), is 1.7%/1.4% above
JPMe/cons.  Consolidated  EBITDA  margin  was  25.4%  (+1.4pp Q/Q)
meaningfully above JPMe of 22.8% and cons 24.1%. Absolute EBITDA of
INR  10.8bn  was  13%/7%  above JPMe/cons.  Indus  margins  declined  3pp
Q/Q to 42.7%. We note that the beat at the EBITDA level vs. our estimates
is  INR  1.24bn  vs. the  ~ INR  700m  beat  at  revenue  driven  by lower-thanexpected network opex.
 Bottom  line  and  EPS:  Net  profit  was  INR  2.75bn  (+13%  Q/Q).  Idea
reported EPS for Q4FY11 of INR 0.83 vs. JPMe and consensus estimate of
INR 0.60 and INR 0.76. Interest expenses relating to 3G auction fee of INR
1.24bn were capitalized during the quarter.
 Capex  guidance:  +25%  Y/Y  spend: Capex  was INR  14.6 bn in  Q4  and
INR  32.1 bn  for  FY  (guidance  of  INR  30bn). Management  has  guided  for
INR 40bn for FY12 or +25% Y/Y. Currently JPMe for FY12 is INR 33bn.
 3G update: Idea has launched 3G services in 9 circles (it has licenses in 11)
and  covers  700 towns.  The  company  stated that  most  of their  NodeBs  are
collocated with existing 2G sites.
 Conference call: Tuesday, June 14 at 2:30pm India time. Dial in details:
India:  +91-22-6629  0339/  +91-22-3065  0126; Hong Kong  +  800  964  448,
Singapore + 800 101 2045; UK +0 808 101 1573; USA +1 866 746 2133