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Idea Cellular Ltd.
Robust 1Q but cautious
undertone
„1Q FY12 EBITDA beats expectations led by higher margins
Idea’s consolidated 1Q FY12 EBITDA grew 35% YoY & 15% QoQ. EBITDA was
12% above our expectations due to higher than expected margins. Margins
improved both YoY & QoQ. A key surprise was the sooner-than-expected rise in
revenue per minute (+1% QoQ) owing to lower promotions. SG&A expenses also
fell sharply (-11% QoQ) likely due to lower advertising & lower subscriber adds.
Margins could rise a tad further; EBITDA up, EPS unchanged
We expect EBITDA margins to improve a tad further through the rest of FY12
owing to recent 20% hike in on-net tariffs and cut in dealer commissions on new
subscriber additions. Factoring the 1Q margin surprise, we have hiked FY12-13E
EBITDA by ~9%; this is the primary driver of our 5% PO increase to Rs100/sh.
EPS estimates for FY12-13 are largely unchanged due to offset from higher
taxes, in line with 1Q FY12, post expiry of tax-holiday for key circles.
Long-term risk-reward appears unexciting; stay Neutral
Despite our positive earnings outlook for Idea, we are Neutral on the stock as
valuation upside seems limited and tariff hikes seem unlikely to sustain beyond 2-
3 quarters unless the industry consolidates. In addition to regulatory concerns, we
worry that competition may resurface and traffic growth for Idea may slow. Note,
Idea’s 1Q FY12 traffic growth lagged average subscriber growth in contrast with
the 1Q trend of the last two years when traffic growth was relatively stronger.
Idea mgt. cautions on tariff impact; confirms low 3G uptake
On its results call, top mgt. cautioned about exuberance over tariff hikes as impact
on revenue market share & traffic growth will be key to sustainability of tariffs. On
3G, the Co said only 20-25% of its 3G sign-ups use the services on a daily basis
1Q FY12 result highlights
Headline profits in line due to sharp rise in taxes: Idea reported 1Q FY12
net profit at Rs1.77bn, down 12% YoY and 35% QoQ. EBITDA performance was
stronger than expected but headline profit was dragged by higher interest and a
sharp rise in effective tax rate from 17% in 4Q FY11 to 30% in 1Q FY12.
EBITDA beats expectations – revenue per minute up QoQ: Consolidated
1Q FY12 EBITDA grew 35% YoY and 15% QoQ. EBITDA was 12% above our
expectations due to higher than expected margins. Consolidated EBITDA margin
improved both YoY (+240bps) & QoQ (+180bps). On a YoY basis, the
improvement was likely owing to scale benefits, esp. with regard to network costs.
On a QoQ basis, the improvement was led by 1% rise in revenue per minute and
11% drop in SG&A. The reduction in SG&A may be due to 1) absence of World
Cup related advertising spend seen in 4Q FY11, and 2) part impact of lower gross
subscriber additions.
Established circles lead the margin expansion; new circle losses stable:
EBITDA margins for Idea’s established circles expanded 180bps QoQ on a
reported basis and ~330bps QoQ adjusting for one-offs in 4Q FY11. New circle
losses were stable QoQ at ~Rs1.4bn.
Indus margins improve QoQ: Idea’s results indicate that its tower-sharing joint
venture with Bharti & Vodafone posted ~190bps QoQ improvement in EBITDA
margin to 44.6%. Indus revenues grew 5% QoQ and EBITDA grew 9% QoQ
Interest expenses up sharply led by 3G rollout: Interest expense in 1Q FY12
was nearly 3x 4Q FY11 levels (up 188%) largely due to commissioning of 3G
services and consequent P&L impact of borrowings towards 3G licences.
1Q FY12 capex up sharply YoY; FY12-guidance maintained: Idea’s 1Q
FY12 capex totaled ~Rs10.4bn, up 224% YoY. The Co maintained FY12 capex
guidance at Rs40bn.
Management call highlights
1Q FY12 helped by withdrawal of promotions; impact of recent tariff
hikes still to come: The improvement in revenue per minute (rpm) during 1Q
FY12 was due to reduction in promotional minutes. The Co clarified that higher
rpm in 1Q FY12 does not capture the impact of recent tariff hikes (~20%) in key
markets.
Exuberance over tariff hikes needs to be restrained: Idea said it is carefully
watching the impact of recent tariff hikes on revenue market share and traffic
growth. Tariff strategy and impact of new operators, and traffic elasticity of Idea’s
existing subscribers are points of sensitivity for determining future tariffs.
Low 3G uptake; greater customer engagement required: Idea said it has
signed up 2mn 3G customers since launch of services in Mar ’11. However, only
20-25% of these customers use 3G on a daily basis. Greater customer
engagement on 3G and convergence between 2G data pricing (currently much
cheaper) and 3G data pricing seems key to 3G adoption.
Effective tax rate to stay high: Idea confirmed that its tax rate will stay high
(close to full-tax levels) going forward as tax-holiday in circles acquired prior to
1999 has expired.
Price objective basis & risk
Idea Cellular (IDEAF)
Our PO of Rs100/sh for Idea is based on DCF and implies a valuation of around
7.5x FY13E-EV/EBITDA, i.e. 40% premium vs GEM wireless majors to allow for
stronger long-term growth potential. Stronger than expected 3G revenue rampup, sooner-than-expected industry consolidation and stronger-than-anticipated
Indus profitability could present upside to our PO. Significantly higher competitive
intensity in the industry and dramatic regulatory changes pose downside risks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Idea Cellular Ltd.
Robust 1Q but cautious
undertone
„1Q FY12 EBITDA beats expectations led by higher margins
Idea’s consolidated 1Q FY12 EBITDA grew 35% YoY & 15% QoQ. EBITDA was
12% above our expectations due to higher than expected margins. Margins
improved both YoY & QoQ. A key surprise was the sooner-than-expected rise in
revenue per minute (+1% QoQ) owing to lower promotions. SG&A expenses also
fell sharply (-11% QoQ) likely due to lower advertising & lower subscriber adds.
Margins could rise a tad further; EBITDA up, EPS unchanged
We expect EBITDA margins to improve a tad further through the rest of FY12
owing to recent 20% hike in on-net tariffs and cut in dealer commissions on new
subscriber additions. Factoring the 1Q margin surprise, we have hiked FY12-13E
EBITDA by ~9%; this is the primary driver of our 5% PO increase to Rs100/sh.
EPS estimates for FY12-13 are largely unchanged due to offset from higher
taxes, in line with 1Q FY12, post expiry of tax-holiday for key circles.
Long-term risk-reward appears unexciting; stay Neutral
Despite our positive earnings outlook for Idea, we are Neutral on the stock as
valuation upside seems limited and tariff hikes seem unlikely to sustain beyond 2-
3 quarters unless the industry consolidates. In addition to regulatory concerns, we
worry that competition may resurface and traffic growth for Idea may slow. Note,
Idea’s 1Q FY12 traffic growth lagged average subscriber growth in contrast with
the 1Q trend of the last two years when traffic growth was relatively stronger.
Idea mgt. cautions on tariff impact; confirms low 3G uptake
On its results call, top mgt. cautioned about exuberance over tariff hikes as impact
on revenue market share & traffic growth will be key to sustainability of tariffs. On
3G, the Co said only 20-25% of its 3G sign-ups use the services on a daily basis
1Q FY12 result highlights
Headline profits in line due to sharp rise in taxes: Idea reported 1Q FY12
net profit at Rs1.77bn, down 12% YoY and 35% QoQ. EBITDA performance was
stronger than expected but headline profit was dragged by higher interest and a
sharp rise in effective tax rate from 17% in 4Q FY11 to 30% in 1Q FY12.
EBITDA beats expectations – revenue per minute up QoQ: Consolidated
1Q FY12 EBITDA grew 35% YoY and 15% QoQ. EBITDA was 12% above our
expectations due to higher than expected margins. Consolidated EBITDA margin
improved both YoY (+240bps) & QoQ (+180bps). On a YoY basis, the
improvement was likely owing to scale benefits, esp. with regard to network costs.
On a QoQ basis, the improvement was led by 1% rise in revenue per minute and
11% drop in SG&A. The reduction in SG&A may be due to 1) absence of World
Cup related advertising spend seen in 4Q FY11, and 2) part impact of lower gross
subscriber additions.
Established circles lead the margin expansion; new circle losses stable:
EBITDA margins for Idea’s established circles expanded 180bps QoQ on a
reported basis and ~330bps QoQ adjusting for one-offs in 4Q FY11. New circle
losses were stable QoQ at ~Rs1.4bn.
Indus margins improve QoQ: Idea’s results indicate that its tower-sharing joint
venture with Bharti & Vodafone posted ~190bps QoQ improvement in EBITDA
margin to 44.6%. Indus revenues grew 5% QoQ and EBITDA grew 9% QoQ
Interest expenses up sharply led by 3G rollout: Interest expense in 1Q FY12
was nearly 3x 4Q FY11 levels (up 188%) largely due to commissioning of 3G
services and consequent P&L impact of borrowings towards 3G licences.
1Q FY12 capex up sharply YoY; FY12-guidance maintained: Idea’s 1Q
FY12 capex totaled ~Rs10.4bn, up 224% YoY. The Co maintained FY12 capex
guidance at Rs40bn.
Management call highlights
1Q FY12 helped by withdrawal of promotions; impact of recent tariff
hikes still to come: The improvement in revenue per minute (rpm) during 1Q
FY12 was due to reduction in promotional minutes. The Co clarified that higher
rpm in 1Q FY12 does not capture the impact of recent tariff hikes (~20%) in key
markets.
Exuberance over tariff hikes needs to be restrained: Idea said it is carefully
watching the impact of recent tariff hikes on revenue market share and traffic
growth. Tariff strategy and impact of new operators, and traffic elasticity of Idea’s
existing subscribers are points of sensitivity for determining future tariffs.
Low 3G uptake; greater customer engagement required: Idea said it has
signed up 2mn 3G customers since launch of services in Mar ’11. However, only
20-25% of these customers use 3G on a daily basis. Greater customer
engagement on 3G and convergence between 2G data pricing (currently much
cheaper) and 3G data pricing seems key to 3G adoption.
Effective tax rate to stay high: Idea confirmed that its tax rate will stay high
(close to full-tax levels) going forward as tax-holiday in circles acquired prior to
1999 has expired.
Price objective basis & risk
Idea Cellular (IDEAF)
Our PO of Rs100/sh for Idea is based on DCF and implies a valuation of around
7.5x FY13E-EV/EBITDA, i.e. 40% premium vs GEM wireless majors to allow for
stronger long-term growth potential. Stronger than expected 3G revenue rampup, sooner-than-expected industry consolidation and stronger-than-anticipated
Indus profitability could present upside to our PO. Significantly higher competitive
intensity in the industry and dramatic regulatory changes pose downside risks.
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