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IDEA (IDEA)
Telecom
Impressive quarter; expect competitive environment to remain fluid. REDUCE.
Impressive RPM/ margin performance in 1QFY12 and recent tariff changes by the
incumbents drive material improvements in our estimates and target price on Idea.
Nonetheless, we retain our REDUCE rating on the stock on valuations, potential
regulatory payouts and risks to our revised RPM and volume growth assumptions.
Industry remains in overcapacity zone, which could keep competitive intensity high.
Decline in competitive intensity – a temporary pause or a structural shift?
Lack of aggression from the challengers on network investments and/or tariff interventions, on
account of stretched balance sheets, has provided an opportunity to the incumbents to test waters
on tariff hikes. Bharti (in nearly all circles), and Vodafone/Idea in a few circles have selectively
raised tariffs in the past few days. Two scenarios can emerge from this development –
(1) Challengers, tempted by the potential near-term financial upside, follow the leaders, or
(2) Challengers look at the development as an opportunity to gain volume market share.
Either of these scenarios is possible – scenario 1 is tempting from a short-term perspective given
the balance sheet situation facing the challengers, though we believe it would be detrimental to
the long-term business case of the challengers. Scenario 2 (push for market share) is a more likely
outcome (and the only viable long-term strategy for challengers, in our view), though it is not
difficult to see the challengers tread along on tariff hikes for some time, given the near-term lure
of the first option. Forecasting the timing of return of competitive intensity is difficult, and hence,
we build in improvement in RPM in our revised estimates for Idea. We shall incorporate the same
for Bharti and RCOM post their 1Q results.
1QFY12 – a solid quarter; RPM and margins key positive surprises
Idea reported a solid 1QFY12 with consol revenue growth of 6.8% qoq (broadly in line) and
adjusted EBITDA margin expansion of 290 bps qoq; adjusted EBITDA grew 20% qoq to Rs12 bn
(12.6% higher than our estimate). Net income was impacted by higher D&A and increase in ETR;
reported net income of Rs1.8 bn (down 35% qoq, 12% yoy) still came in 18% above our estimate
on the back of sharp EBITDA beat.
Revise estimates and TP upwards; retain REDUCE rating
We revised our revenues/EBITDA estimates upwards by 1.4/3.8% and 14/16% for FY2012/13E on
the back of revised RPM/margin assumptions. Our revised EPS for FY2012/13E stands at
Rs2.68/Rs4.77. We also increase our end-FY2013E TP to Rs95/share (implies 6.5X FY2013E
EV/EBITDA). Retain REDUCE noting potential regulatory risks and no upside post recent run-up.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IDEA (IDEA)
Telecom
Impressive quarter; expect competitive environment to remain fluid. REDUCE.
Impressive RPM/ margin performance in 1QFY12 and recent tariff changes by the
incumbents drive material improvements in our estimates and target price on Idea.
Nonetheless, we retain our REDUCE rating on the stock on valuations, potential
regulatory payouts and risks to our revised RPM and volume growth assumptions.
Industry remains in overcapacity zone, which could keep competitive intensity high.
Decline in competitive intensity – a temporary pause or a structural shift?
Lack of aggression from the challengers on network investments and/or tariff interventions, on
account of stretched balance sheets, has provided an opportunity to the incumbents to test waters
on tariff hikes. Bharti (in nearly all circles), and Vodafone/Idea in a few circles have selectively
raised tariffs in the past few days. Two scenarios can emerge from this development –
(1) Challengers, tempted by the potential near-term financial upside, follow the leaders, or
(2) Challengers look at the development as an opportunity to gain volume market share.
Either of these scenarios is possible – scenario 1 is tempting from a short-term perspective given
the balance sheet situation facing the challengers, though we believe it would be detrimental to
the long-term business case of the challengers. Scenario 2 (push for market share) is a more likely
outcome (and the only viable long-term strategy for challengers, in our view), though it is not
difficult to see the challengers tread along on tariff hikes for some time, given the near-term lure
of the first option. Forecasting the timing of return of competitive intensity is difficult, and hence,
we build in improvement in RPM in our revised estimates for Idea. We shall incorporate the same
for Bharti and RCOM post their 1Q results.
1QFY12 – a solid quarter; RPM and margins key positive surprises
Idea reported a solid 1QFY12 with consol revenue growth of 6.8% qoq (broadly in line) and
adjusted EBITDA margin expansion of 290 bps qoq; adjusted EBITDA grew 20% qoq to Rs12 bn
(12.6% higher than our estimate). Net income was impacted by higher D&A and increase in ETR;
reported net income of Rs1.8 bn (down 35% qoq, 12% yoy) still came in 18% above our estimate
on the back of sharp EBITDA beat.
Revise estimates and TP upwards; retain REDUCE rating
We revised our revenues/EBITDA estimates upwards by 1.4/3.8% and 14/16% for FY2012/13E on
the back of revised RPM/margin assumptions. Our revised EPS for FY2012/13E stands at
Rs2.68/Rs4.77. We also increase our end-FY2013E TP to Rs95/share (implies 6.5X FY2013E
EV/EBITDA). Retain REDUCE noting potential regulatory risks and no upside post recent run-up.
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