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Idea Cellular Ltd.
F2Q12 Results in Line; Fine-
tuning Estimates
What's Changed
F2012E / 2013E EPS -14.7% / +0.7%
We reiterate our Overweight rating on Idea after the
company reported F2Q12 results in line with our
estimates. We have lowered our F2012 EPS by 15%
to factor in FX losses, but retain our PT of Rs119.
Key Positives
¾ APRM increased by 4.1% QoQ from 41.0p to 42.7p,
largely due to higher VAS contribution, roaming
revenue and revision in promotional tariffs.
¾ VAS revenue increased from 12% in F1Q12 to
13.2% in F2Q12. The 3G data revenue is included
in VAS revenue, which has mainly contributed to
this increase.
¾ Roaming revenue increased during the quarter.
¾ Idea added close to 5k BTS in this quarter, including
2.8k 3G BTS, implying rapid 3G network expansion
Key Negatives
¾ Overall traffic on the network declined by 2% QoQ
to 106.2bn minutes. MOU per sub fell from 391 to
364, i.e., 6.9% QoQ.
¾ EBITDA losses from new circles widened by 27%
QoQ to Rs1.77bn.
We continue to highlight Idea Cellular as our top
pick in Indian Telcos, as we believe that the stock offers
the highest leverage to the wireless business in India.
Idea has increased its revenue market share by 4ppt
and has the highest active subscriber base ratio.
Investment Case
Summary & Conclusions
We reiterate our Overweight rating on Idea Cellular after
the company reported F2Q12 results in-line with our
estimates. Our net profit estimate for the quarter was 32%
below consensus, largely due to FX losses; hence, we believe
that the results missed Street estimates. We have lowered our
F2012E EPS by ~15% to factor in currency losses for this year,
and fine-tuned our estimates for the future years following a
review of our model. Our price target of Rs119 is
unchanged, and implies 30% upside from the current
levels.
Key Positives
¾ APRM increased by 4.1% QoQ from 41.0p to 42.7p.
This follows a 1% sequential increase in ARPM in F1Q12
after a series of ARPM declines for eight to nine quarters.
The company attributed the improvement to higher VAS
contribution, roaming revenues, and revision in
promotional tariffs. Management also highlighted that
tariff hikes implemented in August have had only a
marginal impact on ARPMs this quarter, and the impact
will be felt gradually over the coming two to three quarters.
¾ Contribution of VAS revenues increased from 12% in
F1Q12 to 13.2% in F2Q12. The 3G data revenue is
included in VAS revenue, and mainly contributed to this
increase. Idea now offers 3G services in 20 circles across
India, through a combination of own network and roaming
arrangements with other operators.
¾ Roaming revenues increased during the quarter.
Management highlighted that revenue earned from 3G
roaming arrangements from other operators is included in
roaming revenues, and this also contributed to the
increase in ARPM for the quarter.
¾ Idea added close to 5k BTS in this quarter, including
2.8k 3G BTS, indicating that its 3G network expansion is
progressing rapidly. Management indicated that it will be
launching Idea-branded Android-based smartphones to
make these phones more affordable and help boost the
3G adoption rate.
¾ Idea leads the industry as the highest MNP provider.
The company had a net gain of 1.3mn subs as of
October 16, 2011, and the lowest port-out ratio of only 61
subs against every 100 subs ported in.
Key Negatives
¾ Overall traffic on the network declined by 2% QoQ to
106.2bn minutes. MOU per sub fell from 391 to 364 (i.e.,
6.9% QoQ). Management highlighted that this is largely
due to seasonality, and there has been an improvement in
the MOU trends in the month of October.
¾ EBITDA losses from new circles widened by 27% QoQ
to Rs1.77bn. This is largely due to higher 3G roaming
charges, as Idea does not have its own 3G network in
most of these circles. Management also indicated that
since the September quarter is seasonally weak, revenue
growth was not commensurate with the investment during
the quarter, and its expects revenues to pick up in the
coming quarters.
What Does this Mean to Our Numbers?
Our revenue forecasts are largely unchanged, however, we
now estimate the EBITDA losses from the new circles to be in
the range of Rs1.8bn per quarter vs. Rs1.4bn per quarter
previously, leading to higher EBITDA losses from new circles
for the full year. We believe that the overall EBITDA for the
company still can marginally increase in the coming quarters
due to the impact of the tariff hikes, leading to an increase in
ARPMs. Total minutes for the year would be lower due to the
MOU decline during the quarter, although our revised total
minutes growth assumption remains healthy at 22% per annum.
We have factored in forex losses for the year, thus lowering our
F2012 net profit estimate by 15%. We currently assume
blended ARPMs to fall by ~1% in F2012 and F2013. However,
if we assume flat ARPM trends, then our EPS would increase
by 3% and 5% for F2012 and F2013, respectively.
Valuation Methodology
Our 12-month target price for Idea is unchanged at
Rs119/share. We base it on our DCF model and the value we
attribute to the company’s towers. Our sum-of-the-parts
valuation is shown in Exhibit 3.
Our core business value for Idea remains the midpoint of the
value derived from our DCF calculation on a one-year forward
basis, assuming a terminal growth rate of 3% and a cost of
capital of 12%, as shown in Exhibit 4. Based on our revised
estimates, we arrive at our new core business enterprise value
of Rs118/share. Net debt equates to Rs14/share.
We value Idea’s towers in Indus using DCF and use an
EV/tower of US$100,000 to value the company’s directly
owned towers. The combined value for Idea’s towers is
US$2.2bn, or Rs30/share, 32% of its market cap. We add this
tower value to our core business equity value (Exhibit 3).
We also incorporate regulatory payouts for excess spectrum
beyond 6.2MHz and cost of renewal of total spectrum on expiry
of licenses. These two charges amount to US$322mn, or Rs4
per share, and US$862mn, or Rs12 per share, respectively.
Exhibit 3
Idea Cellular: Sum-of-the-parts Valuation (Rs)
Core Business Enterprise Value 118
Net Debt 14
Core Business Equity Value 105
Tower Valuation 30
Regulatory Payouts (16)
Target Price 119
Source: Company data, Morgan Stanley Research
Exhibit 4
Idea Cellular: Cost of Capital Assumptions
Risk Free Return (Rf) 8.0%
Market Premium (Rm) 6.0%
Assumed Beta 0.98
Cost of Equity (Re) 13.9%
Equity (%) 60.0%
Cost of Debt (Rd) 12.0%
Tax rate 22.5%
After-tax cost of debt (Rd [1-t]) 9.3%
Debt (%) 40.0%
WACC 12.0%
Assumed WACC 12.0%
Source: Company data, Morgan Stanley Research
Downside risks to our price target:
• Greater-than-expected fall in tariffs due to aggressive
pricing from new operators to gain subscribers.
• Intensified competition from regional operators, leading
some to exit the business or consolidate.
• CDMA operators resume major handset subsidies.
• Regulatory uncertainty regarding spectrum and Idea’s
need to pay additional spectrum charges.
Catalysts
The recent entry of players such as Sistema and Telenor to the
Indian market, as well as the auction of 3G, has highlighted the
scarcity value of Indian spectrum. As the smallest of the listed,
pan-Indian wireless players, with one of the largest spectrums
in the country, Idea might offer strategic value in any future
industry consolidation – a prominent industry theme that has
been discussed widely in numerous leading news media
outlets (please see “Consolidation in the sector: Telcos seek
M&A-friendly policy,” The Financial Express, January 17, 2011;
and “Government to redraw M&A rules in new telecom policy,”
Business Standard, January 2, 2011). Idea has not, however,
made any comment of late on consolidation.
Other potential catalysts are:
• Lower-than-expected losses in new circles, which could
improve EBITDA margins.
• License fee reduction for the industry as a whole.
• Having higher spectrum relative to its subscriber base,
leading to future reduction in capex.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Idea Cellular Ltd.
F2Q12 Results in Line; Fine-
tuning Estimates
What's Changed
F2012E / 2013E EPS -14.7% / +0.7%
We reiterate our Overweight rating on Idea after the
company reported F2Q12 results in line with our
estimates. We have lowered our F2012 EPS by 15%
to factor in FX losses, but retain our PT of Rs119.
Key Positives
¾ APRM increased by 4.1% QoQ from 41.0p to 42.7p,
largely due to higher VAS contribution, roaming
revenue and revision in promotional tariffs.
¾ VAS revenue increased from 12% in F1Q12 to
13.2% in F2Q12. The 3G data revenue is included
in VAS revenue, which has mainly contributed to
this increase.
¾ Roaming revenue increased during the quarter.
¾ Idea added close to 5k BTS in this quarter, including
2.8k 3G BTS, implying rapid 3G network expansion
Key Negatives
¾ Overall traffic on the network declined by 2% QoQ
to 106.2bn minutes. MOU per sub fell from 391 to
364, i.e., 6.9% QoQ.
¾ EBITDA losses from new circles widened by 27%
QoQ to Rs1.77bn.
We continue to highlight Idea Cellular as our top
pick in Indian Telcos, as we believe that the stock offers
the highest leverage to the wireless business in India.
Idea has increased its revenue market share by 4ppt
and has the highest active subscriber base ratio.
Investment Case
Summary & Conclusions
We reiterate our Overweight rating on Idea Cellular after
the company reported F2Q12 results in-line with our
estimates. Our net profit estimate for the quarter was 32%
below consensus, largely due to FX losses; hence, we believe
that the results missed Street estimates. We have lowered our
F2012E EPS by ~15% to factor in currency losses for this year,
and fine-tuned our estimates for the future years following a
review of our model. Our price target of Rs119 is
unchanged, and implies 30% upside from the current
levels.
Key Positives
¾ APRM increased by 4.1% QoQ from 41.0p to 42.7p.
This follows a 1% sequential increase in ARPM in F1Q12
after a series of ARPM declines for eight to nine quarters.
The company attributed the improvement to higher VAS
contribution, roaming revenues, and revision in
promotional tariffs. Management also highlighted that
tariff hikes implemented in August have had only a
marginal impact on ARPMs this quarter, and the impact
will be felt gradually over the coming two to three quarters.
¾ Contribution of VAS revenues increased from 12% in
F1Q12 to 13.2% in F2Q12. The 3G data revenue is
included in VAS revenue, and mainly contributed to this
increase. Idea now offers 3G services in 20 circles across
India, through a combination of own network and roaming
arrangements with other operators.
¾ Roaming revenues increased during the quarter.
Management highlighted that revenue earned from 3G
roaming arrangements from other operators is included in
roaming revenues, and this also contributed to the
increase in ARPM for the quarter.
¾ Idea added close to 5k BTS in this quarter, including
2.8k 3G BTS, indicating that its 3G network expansion is
progressing rapidly. Management indicated that it will be
launching Idea-branded Android-based smartphones to
make these phones more affordable and help boost the
3G adoption rate.
¾ Idea leads the industry as the highest MNP provider.
The company had a net gain of 1.3mn subs as of
October 16, 2011, and the lowest port-out ratio of only 61
subs against every 100 subs ported in.
Key Negatives
¾ Overall traffic on the network declined by 2% QoQ to
106.2bn minutes. MOU per sub fell from 391 to 364 (i.e.,
6.9% QoQ). Management highlighted that this is largely
due to seasonality, and there has been an improvement in
the MOU trends in the month of October.
¾ EBITDA losses from new circles widened by 27% QoQ
to Rs1.77bn. This is largely due to higher 3G roaming
charges, as Idea does not have its own 3G network in
most of these circles. Management also indicated that
since the September quarter is seasonally weak, revenue
growth was not commensurate with the investment during
the quarter, and its expects revenues to pick up in the
coming quarters.
What Does this Mean to Our Numbers?
Our revenue forecasts are largely unchanged, however, we
now estimate the EBITDA losses from the new circles to be in
the range of Rs1.8bn per quarter vs. Rs1.4bn per quarter
previously, leading to higher EBITDA losses from new circles
for the full year. We believe that the overall EBITDA for the
company still can marginally increase in the coming quarters
due to the impact of the tariff hikes, leading to an increase in
ARPMs. Total minutes for the year would be lower due to the
MOU decline during the quarter, although our revised total
minutes growth assumption remains healthy at 22% per annum.
We have factored in forex losses for the year, thus lowering our
F2012 net profit estimate by 15%. We currently assume
blended ARPMs to fall by ~1% in F2012 and F2013. However,
if we assume flat ARPM trends, then our EPS would increase
by 3% and 5% for F2012 and F2013, respectively.
Valuation Methodology
Our 12-month target price for Idea is unchanged at
Rs119/share. We base it on our DCF model and the value we
attribute to the company’s towers. Our sum-of-the-parts
valuation is shown in Exhibit 3.
Our core business value for Idea remains the midpoint of the
value derived from our DCF calculation on a one-year forward
basis, assuming a terminal growth rate of 3% and a cost of
capital of 12%, as shown in Exhibit 4. Based on our revised
estimates, we arrive at our new core business enterprise value
of Rs118/share. Net debt equates to Rs14/share.
We value Idea’s towers in Indus using DCF and use an
EV/tower of US$100,000 to value the company’s directly
owned towers. The combined value for Idea’s towers is
US$2.2bn, or Rs30/share, 32% of its market cap. We add this
tower value to our core business equity value (Exhibit 3).
We also incorporate regulatory payouts for excess spectrum
beyond 6.2MHz and cost of renewal of total spectrum on expiry
of licenses. These two charges amount to US$322mn, or Rs4
per share, and US$862mn, or Rs12 per share, respectively.
Exhibit 3
Idea Cellular: Sum-of-the-parts Valuation (Rs)
Core Business Enterprise Value 118
Net Debt 14
Core Business Equity Value 105
Tower Valuation 30
Regulatory Payouts (16)
Target Price 119
Source: Company data, Morgan Stanley Research
Exhibit 4
Idea Cellular: Cost of Capital Assumptions
Risk Free Return (Rf) 8.0%
Market Premium (Rm) 6.0%
Assumed Beta 0.98
Cost of Equity (Re) 13.9%
Equity (%) 60.0%
Cost of Debt (Rd) 12.0%
Tax rate 22.5%
After-tax cost of debt (Rd [1-t]) 9.3%
Debt (%) 40.0%
WACC 12.0%
Assumed WACC 12.0%
Source: Company data, Morgan Stanley Research
Downside risks to our price target:
• Greater-than-expected fall in tariffs due to aggressive
pricing from new operators to gain subscribers.
• Intensified competition from regional operators, leading
some to exit the business or consolidate.
• CDMA operators resume major handset subsidies.
• Regulatory uncertainty regarding spectrum and Idea’s
need to pay additional spectrum charges.
Catalysts
The recent entry of players such as Sistema and Telenor to the
Indian market, as well as the auction of 3G, has highlighted the
scarcity value of Indian spectrum. As the smallest of the listed,
pan-Indian wireless players, with one of the largest spectrums
in the country, Idea might offer strategic value in any future
industry consolidation – a prominent industry theme that has
been discussed widely in numerous leading news media
outlets (please see “Consolidation in the sector: Telcos seek
M&A-friendly policy,” The Financial Express, January 17, 2011;
and “Government to redraw M&A rules in new telecom policy,”
Business Standard, January 2, 2011). Idea has not, however,
made any comment of late on consolidation.
Other potential catalysts are:
• Lower-than-expected losses in new circles, which could
improve EBITDA margins.
• License fee reduction for the industry as a whole.
• Having higher spectrum relative to its subscriber base,
leading to future reduction in capex.
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