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Annual report analysis
Idea Cellular’s annual report reveals 50% YoY rise in contingent liabilities
to Rs15bn and continuing pledge on 60% of its Indus Tower ownership.
Capex jumped 97% and capital work in progress sevenfold, and 3G fees
of Rs58bn caused intangibles to rise two fold. Debt increased 54%YoY to
3x net debt to Ebitda and ROIC is a low 6%. New 2G circles are dragging
on profitability while 3G ramp-up is sluggish. We expect the operator’s
FY12 profits to fall 25% YoY and free cashflow to remain elusive with the
risk of further investments for 2G/3G spectrum. Maintain Underperform.
High debt burden, Indus pledge.
Idea’s FY11 annual report reveals a negative working capital of Rs22bn and
that 3G caused debt to increase 54% YoY to Rs121bn/US$2.7bn (gearing at
3x net debt to Ebitda) and ROIC (down 12ppts from peak) of less than 6%. In
FY11, Idea capitalised Rs4.1bn of interest on 3G considering which debt cost
is 9% and 26% is the share of foreign currency loans. Depreciation for
network equipment at 10-20 years is liberal compared with Bharti Airtel at 3
to 20 years and regional peers at seven years and carries a risk of a step-up
or one-time write-off in future. The annual report also reveals contingent
liabilities of Rs15bn (2x profits), a 50% YoY increase and the Department of
Telecommunications has obtained ex-party stay from court against the
amalgamation of Spice Telecom with Idea. In other details, Idea’s pledge on
60% of its 13.2% effective ownership in Indus Towers has continued.
New 2G circles still dragging profitability.
Idea’s 13 established areas still contribute 89% of total revenue and though
revenue market share in nine new circles increased 150bpsYoY, Ebitda loss
here has increased 29%YoY to Rs5.4bn after 10 quarters of rollouts. With new
circles Ebitda margin still negative 36%, Idea’s consolidated margins in FY11
further slipped 300bps to 24% largely due to higher network operating
expenses and access charges. Network operating cost as a percentage of
revenue continues to be 3-6ppts higher than Bharti, also with the new circle
in the 1,800MHz band and allocations of only 4.4MHz spectrum.
Sluggish 3G ramp-up, risk of further investments.
In 3G, Idea’s 11 circle wins cover about 76% of the company’s revenue base
(mainly established circles) but despite having launched services in March
2011, and now offering coverage in 15 circles (with bilateral roaming
agreements in six) 3G subscribers are still only two million and value-added
services (VAS) as a percentage of Arpu has declined 90bps to 12%. Also with
the miss of 3G in crucial urban areas of Mumbai and Delhi, and eight of nine
new circles, Idea is facing the risk of affecting its competitive positioning.
Already the slowdown in net additions in new circles (without 3G) has been
sharper at 0.06m (for 1QFY12) against average 1.2m quarterly in FY11. Led
by 3G, capex in FY11 jumped 97% to Rs97bn/US$2.2bn and CWIP sevenfold
to Rs37bn including part licence fees of Rs58bn/US$1.3bn and intangibles
twofold to Rs72bn/US$1.6bn. Yet Idea faces the risk of further investments in
2G and 3G spectrum aggregating to a high Rs212bn/US$4.7bn (Rs64/share)
and even part of these will force free cashflow to remain negative. With the
stock trading at 9x EV/Ebitda, an 85% premium to regional peers is
expensive. We maintain our Underperform rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Annual report analysis
Idea Cellular’s annual report reveals 50% YoY rise in contingent liabilities
to Rs15bn and continuing pledge on 60% of its Indus Tower ownership.
Capex jumped 97% and capital work in progress sevenfold, and 3G fees
of Rs58bn caused intangibles to rise two fold. Debt increased 54%YoY to
3x net debt to Ebitda and ROIC is a low 6%. New 2G circles are dragging
on profitability while 3G ramp-up is sluggish. We expect the operator’s
FY12 profits to fall 25% YoY and free cashflow to remain elusive with the
risk of further investments for 2G/3G spectrum. Maintain Underperform.
High debt burden, Indus pledge.
Idea’s FY11 annual report reveals a negative working capital of Rs22bn and
that 3G caused debt to increase 54% YoY to Rs121bn/US$2.7bn (gearing at
3x net debt to Ebitda) and ROIC (down 12ppts from peak) of less than 6%. In
FY11, Idea capitalised Rs4.1bn of interest on 3G considering which debt cost
is 9% and 26% is the share of foreign currency loans. Depreciation for
network equipment at 10-20 years is liberal compared with Bharti Airtel at 3
to 20 years and regional peers at seven years and carries a risk of a step-up
or one-time write-off in future. The annual report also reveals contingent
liabilities of Rs15bn (2x profits), a 50% YoY increase and the Department of
Telecommunications has obtained ex-party stay from court against the
amalgamation of Spice Telecom with Idea. In other details, Idea’s pledge on
60% of its 13.2% effective ownership in Indus Towers has continued.
New 2G circles still dragging profitability.
Idea’s 13 established areas still contribute 89% of total revenue and though
revenue market share in nine new circles increased 150bpsYoY, Ebitda loss
here has increased 29%YoY to Rs5.4bn after 10 quarters of rollouts. With new
circles Ebitda margin still negative 36%, Idea’s consolidated margins in FY11
further slipped 300bps to 24% largely due to higher network operating
expenses and access charges. Network operating cost as a percentage of
revenue continues to be 3-6ppts higher than Bharti, also with the new circle
in the 1,800MHz band and allocations of only 4.4MHz spectrum.
Sluggish 3G ramp-up, risk of further investments.
In 3G, Idea’s 11 circle wins cover about 76% of the company’s revenue base
(mainly established circles) but despite having launched services in March
2011, and now offering coverage in 15 circles (with bilateral roaming
agreements in six) 3G subscribers are still only two million and value-added
services (VAS) as a percentage of Arpu has declined 90bps to 12%. Also with
the miss of 3G in crucial urban areas of Mumbai and Delhi, and eight of nine
new circles, Idea is facing the risk of affecting its competitive positioning.
Already the slowdown in net additions in new circles (without 3G) has been
sharper at 0.06m (for 1QFY12) against average 1.2m quarterly in FY11. Led
by 3G, capex in FY11 jumped 97% to Rs97bn/US$2.2bn and CWIP sevenfold
to Rs37bn including part licence fees of Rs58bn/US$1.3bn and intangibles
twofold to Rs72bn/US$1.6bn. Yet Idea faces the risk of further investments in
2G and 3G spectrum aggregating to a high Rs212bn/US$4.7bn (Rs64/share)
and even part of these will force free cashflow to remain negative. With the
stock trading at 9x EV/Ebitda, an 85% premium to regional peers is
expensive. We maintain our Underperform rating.
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