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Incoming risks
The recent mobile tariff hikes have driven Idea Cellular’s outperformance.
However, India’s slowing 2G growth, sluggish 3G pickup and the end of
domestic roaming tariffs add multiple risks to our forecast. The delayed
2G expansion has hurt margins while 3G rollouts create new cost
pressures. With sub-par returns of 6%, valuations are high and further
spectrum payments could stretch the balance sheet. Our Rs80 target
suggests 17% downside and we downgrade from Underperform to SELL.
Recent tariff hike selective
The recent tariff hikes have been selective. With potential for regulatory
intervention, more increases are unlikely. The National Telecom Policy 2011 (NTP
11) will cut domestic roaming rates while monthly 2G net additions have fallen
55% from a peak of 23 million to below 10 million in the past three months. Idea
net adds will drop from 2.1 million in FY11 to 1.6 million in FY12CL with a 3%
Arpu decline over FY11-14CL. While Idea will see a 16% revenue Cagr, downside
risks include slowing growth, sluggish 3G pickup and the end of roaming rates.
Capped margins; new cost pressures
The delayed 2G expansions have caused a 9ppt contraction in Ebitda margin
over FY08-11 to 24% with a 10ppt jump in network operating costs. Here Idea
continues to incur Ebitda losses (up 19% QoQ even in 1QFY12) and many of
the margin pressures appear structural. Idea will face additional cost pressures
with the 3G rollouts in 11 circles, an increase in network costs and with savings
in subscriber acquisition costs unlikely, margins will remain capped.
High regulatory risks
Idea’s soaring interest, depreciation and taxation will cause profits to stay flat
over FY11-14CL. ROIC has dropped 12ppts to 6% and will remain sub-par.
Further risks will come from the upcoming NTP 11 in terms of additional
payments for 2G spectrum above 6.2MHz, renewal of 2G licences, the need to
complete its 3G footprint and the future challenge of 4G deployment.
Risk-reward unfavourable
We see no visible M&A upside or tower deal to unlock value. The stock is
trading at 2.5x PB with a 6% ROE/ROIC, and valuations of 41x FY13CL PE and
8x EV/Ebitda are at risk from earnings downgrades. We are 22-59% below
consensus, which is more aggressive on tariff hikes and margin expansion. Our
Rs80 target is based on DCF. Should even part of the regulatory risk
materialise, our target would fall to Rs71, making the risk-reward unfavourable.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Incoming risks
The recent mobile tariff hikes have driven Idea Cellular’s outperformance.
However, India’s slowing 2G growth, sluggish 3G pickup and the end of
domestic roaming tariffs add multiple risks to our forecast. The delayed
2G expansion has hurt margins while 3G rollouts create new cost
pressures. With sub-par returns of 6%, valuations are high and further
spectrum payments could stretch the balance sheet. Our Rs80 target
suggests 17% downside and we downgrade from Underperform to SELL.
Recent tariff hike selective
The recent tariff hikes have been selective. With potential for regulatory
intervention, more increases are unlikely. The National Telecom Policy 2011 (NTP
11) will cut domestic roaming rates while monthly 2G net additions have fallen
55% from a peak of 23 million to below 10 million in the past three months. Idea
net adds will drop from 2.1 million in FY11 to 1.6 million in FY12CL with a 3%
Arpu decline over FY11-14CL. While Idea will see a 16% revenue Cagr, downside
risks include slowing growth, sluggish 3G pickup and the end of roaming rates.
Capped margins; new cost pressures
The delayed 2G expansions have caused a 9ppt contraction in Ebitda margin
over FY08-11 to 24% with a 10ppt jump in network operating costs. Here Idea
continues to incur Ebitda losses (up 19% QoQ even in 1QFY12) and many of
the margin pressures appear structural. Idea will face additional cost pressures
with the 3G rollouts in 11 circles, an increase in network costs and with savings
in subscriber acquisition costs unlikely, margins will remain capped.
High regulatory risks
Idea’s soaring interest, depreciation and taxation will cause profits to stay flat
over FY11-14CL. ROIC has dropped 12ppts to 6% and will remain sub-par.
Further risks will come from the upcoming NTP 11 in terms of additional
payments for 2G spectrum above 6.2MHz, renewal of 2G licences, the need to
complete its 3G footprint and the future challenge of 4G deployment.
Risk-reward unfavourable
We see no visible M&A upside or tower deal to unlock value. The stock is
trading at 2.5x PB with a 6% ROE/ROIC, and valuations of 41x FY13CL PE and
8x EV/Ebitda are at risk from earnings downgrades. We are 22-59% below
consensus, which is more aggressive on tariff hikes and margin expansion. Our
Rs80 target is based on DCF. Should even part of the regulatory risk
materialise, our target would fall to Rs71, making the risk-reward unfavourable.
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