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Idea Cellular
Upgrade?! Naah… Not yet!
Event
Idea reported decent 1QFY12 results today. EBITDA was 4% ahead of our
estimates (we were 5% ahead of the street). The industry has also seen tariff
increases in the last few weeks, which caused the impressive rally in telecom
stocks. We upgrade earnings estimates and target price but still see no
reason to chase the stock at an FY12E PER of 36x. Maintain Underperform.
Impact
Good results on key operating parameters: Top line (Rs45.2bn was exactly
in line with our forecast. Meanwhile EBITDA surprised positively- the key
operating highlight that investors had their eye on. Importantly, churn stood at
9.6x (versus 10.7x QoQ). ARPM was up ~1% QoQ (versus our expectation of
a ~0.5% decline)- the first sequential increase after nine quarters.
ARPM upgrades due to tariff adjustments: Idea is responding to recent
tariff increases by Bharti with similar moves. We expect headline (on-net) tariff
increases, lower trade margins and tactical withdrawal of discounted
packages to drive ARPM growth. We now expect ARPMs to remain flat
(+/- 0.5p) in the next couple of quarters. We then expect them to rise gradually
and end up around 7% higher at the end of eight quarters from now. It is likely
to take that long for the full impact to be felt as pre-paid subscribers recharge
plans over the next four quarters. In addition, the hikes are likely to be rolled
out and absorbed at a slower rate into geographies with lower income levels.
Earnings and target price revision
We have increased our earnings estimates for FY12, FY13 and FY14 by
5.9%, 11.3% and 10.7% respectively. This is based on the factors discussedoffset by a higher tax rate. Our target price has increased from Rs52 to Rs66
as a result.
Price catalyst
12-month price target: Rs66.00 based on a Sum of Parts methodology.
Catalyst: News on operating metrics (ARPM/ tariffs/ 3G), new telecom policy
Action and recommendation
Maintain Underperform rating: Idea has delivered two consecutive decent
quarters now. Tariff increases in the industry are also encouraging. However,
Idea continues to trade (36x FY12E PER and 21.4x FY13E PER) at a
premium to industry peers (Bharti trades at 22x FY12E and 16x FY13E PER)
driven by M&A expectations. We maintain our view that Idea will instead
emerge as a consolidator when M&A / spectrum regulations turn supportive.
Idea is a pure play in the sector with a strong business model and operations.
At some stage, we believe Idea may be an interesting play on the sector. We
wait for clarity on the telecom policy (notably M&A rules) and the valuation
premium to shrink before we reconsider our position. Switch to Bharti, our
preferred (and cheaper) way to play the sector.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Idea Cellular
Upgrade?! Naah… Not yet!
Event
Idea reported decent 1QFY12 results today. EBITDA was 4% ahead of our
estimates (we were 5% ahead of the street). The industry has also seen tariff
increases in the last few weeks, which caused the impressive rally in telecom
stocks. We upgrade earnings estimates and target price but still see no
reason to chase the stock at an FY12E PER of 36x. Maintain Underperform.
Impact
Good results on key operating parameters: Top line (Rs45.2bn was exactly
in line with our forecast. Meanwhile EBITDA surprised positively- the key
operating highlight that investors had their eye on. Importantly, churn stood at
9.6x (versus 10.7x QoQ). ARPM was up ~1% QoQ (versus our expectation of
a ~0.5% decline)- the first sequential increase after nine quarters.
ARPM upgrades due to tariff adjustments: Idea is responding to recent
tariff increases by Bharti with similar moves. We expect headline (on-net) tariff
increases, lower trade margins and tactical withdrawal of discounted
packages to drive ARPM growth. We now expect ARPMs to remain flat
(+/- 0.5p) in the next couple of quarters. We then expect them to rise gradually
and end up around 7% higher at the end of eight quarters from now. It is likely
to take that long for the full impact to be felt as pre-paid subscribers recharge
plans over the next four quarters. In addition, the hikes are likely to be rolled
out and absorbed at a slower rate into geographies with lower income levels.
Earnings and target price revision
We have increased our earnings estimates for FY12, FY13 and FY14 by
5.9%, 11.3% and 10.7% respectively. This is based on the factors discussedoffset by a higher tax rate. Our target price has increased from Rs52 to Rs66
as a result.
Price catalyst
12-month price target: Rs66.00 based on a Sum of Parts methodology.
Catalyst: News on operating metrics (ARPM/ tariffs/ 3G), new telecom policy
Action and recommendation
Maintain Underperform rating: Idea has delivered two consecutive decent
quarters now. Tariff increases in the industry are also encouraging. However,
Idea continues to trade (36x FY12E PER and 21.4x FY13E PER) at a
premium to industry peers (Bharti trades at 22x FY12E and 16x FY13E PER)
driven by M&A expectations. We maintain our view that Idea will instead
emerge as a consolidator when M&A / spectrum regulations turn supportive.
Idea is a pure play in the sector with a strong business model and operations.
At some stage, we believe Idea may be an interesting play on the sector. We
wait for clarity on the telecom policy (notably M&A rules) and the valuation
premium to shrink before we reconsider our position. Switch to Bharti, our
preferred (and cheaper) way to play the sector.
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