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Idea Cellular Ltd.
Topline risks cast shadow on
tariff upside
�� Topline worries but +ve margin outlook; Maintain Neutral
Idea reported disappointing 2Q results as topline grew only 2% QoQ & EBITDA
contracted 2% QoQ. Post results, our EBITDA for FY12E stands trimmed by ~2%
on tad slower subscriber growth & FY13E stays mostly unchanged; EPS cuts are
sharp due to higher interest & depreciation. We maintain our Neutral rating on the
stock due to positive margin outlook for next 2 quarters & likely postponement of
policy risks, counter-balanced by downside risks to topline. PO stays at Rs100/sh
Weak traffic dragged 2Q; topline remains the major worry
In 2Q FY12, Idea’s traffic contracted 2% QoQ for the first time in recent years.
Idea’s top mgt. attributed this to deeper seasonality owing to rising proportion of
rural subscribers & said recent (Oct ’11) traffic trend was encouraging. We have
left topline estimates unchanged for now but worry that risks are on the downside
Roaming pacts impact 2Q margins; we see room for upside
In 2Q FY12, Idea’s EBITDA margin fell ~110bps QoQ despite a reported 4% QoQ
improvement in revenue per minute (rpm). We estimate that the 2Q margin drop
was accentuated by 3G roaming pacts, assuming reciprocal sharing. Adjusting for
roaming & data uptake, we estimate voice rpm improved ~1% QoQ in 2Q. Over
next 2 qtrs impact of on-net tariff hikes should further lift voice rpm & margins
Mgt highlights: roaming abolition - complex; slow 3G uptake
On its post results call, Idea’s top management said that recent policy vision of
“One India, free roaming” will be complex to implement. On 3G, Idea reported
~2.5mn subs but said that only 30% had seriously used the services. To facilitate
3G adoption, Idea is working to launch own-branded android-based smartphones.
2Q FY12 highlights
Headline profits disappoint on topline and margin weakness: Idea reported
2Q FY12 net profit at Rs1.06bn, down 41% YoY and 40% QoQ. Results were
below consensus and our expectations due to both weaker topline and lower
margins; in 2Q FY12, topline grew 2% QoQ and EBITDA fell 2% QoQ. Reported
PAT was also dragged by Rs313mn of forex loss.
Traffic contracts 2% QoQ: deeper seasonality or elasticity to tariff hikes?
In 2Q FY12, Idea’s total traffic contracted 2% QoQ despite 6% QoQ growth in
average subscriber base. Higher rpm was the key driver of 2% QoQ topline
growth. In 2Q FY12, MoU/sub fell 7% QoQ – the sharpest QoQ drop in recent
years - pointing to deeper seasonality and/or usage elasticity to tariff hikes. 2Q
FY12 appears to be the first time in recent years when Idea witnessed QoQ traffic
contraction.
Sharp improvement in revenue per minute, helped by 3G roaming pacts:
In 2Q, Idea’s overall revenue per minute (rpm) improved 4% QoQ. This reflects a
combination of 3G roaming pacts, improved data uptake (VAS rose 110bps QoQ
to 13.2%) and recent tariff hikes. Assuming that 3G roaming arrangements are on
a reciprocal basis at this stage, we estimate that core voice pricing for Idea
improved ~1% QoQ.
EBITDA margin drop likely accentuated by roaming pacts: Idea’s EBITDA
margin in 2Q FY12 fell 110bps QoQ to 25.5%. We think the margin drop would
have been lower if one adjusted the impact of 3G roaming on topline. 2Q margins
were dragged by higher network costs and increase in employee expenses but
helped by lower SG&A expenses (likely reflecting lower dealer commissions).
Established circle’ margins slip a tad; new circle losses up: In 2Q, Idea’s
established circles witnessed ~4% QoQ decline in ARPU while new circles ARPU
fell 1% QoQ. Overall, Idea’s blended ARPU fell 3% QoQ. Despite relatively higher
ARPU decline, Idea’s established circle margins slipped only a tad (20bps) to
29.4% likely supported by better rpm and lower SG&A. New circle losses rose
sharply from Rs1.4bn in 1Q FY12 to Rs1.8bn in 2Q FY12. Idea said the rise in
new circle losses was primarily due to impact of 3G roaming pacts.
Indus margins improve QoQ despite flat topline: Idea’s results indicate that
its tower-sharing joint venture with Bharti & Vodafone posted ~170bps QoQ
improvement in EBITDA margin to 46.3% despite flat revenues.
Interest expenses up due to forex loss: Interest expense in 2Q FY12 was up
19% QoQ largely due to forex loss of ~Rs313mn.
1H FY12 capex on track versus FY12-guidance: Idea’s 1H FY12 capex
totaled ~Rs21bn (including Rs2.8bn fx adjustment) largely in line with FY12
guidance of Rs40bn.
Management call highlights
Draft NTP-2011 vision of free roaming - complex to implement
Idea believes that the draft telecom policy’s vision statement of moving towards
“free roaming” will be complex to implement and will involve multiple discussions
with operators given the current regime of circle-wise licencing.
3G adoption still slow; 30% activity level as of Sep ‘11
Idea’s 3G subscriber base stood at 2.5mn as of Sep ’11 (2.5% of total sub base)
but the Co said its serious 3G users were far fewer at ~0.75mn for the month of
Sep ’11.
Idea-branded 3G handsets on the anvil
To facilitate faster 3G adoption, Idea is working to launch own-branded androidbased
smartphones. The Co emphasized that it may be able to lower phone
prices through better procurement but has no intention to subsidize handsets.
3G roaming pacts – compliant with law
In the context of reported regulatory scrutiny of 3G roaming pacts, Idea said the
company is fully compliant with existing laws and licence conditions. The Co does
not see any risk to its data/3G offerings.
Price objective basis & risk
Idea Cellular (IDEAF)
Our PO of Rs100/sh for Idea is based on DCF and implies a valuation of around
7-7.5x 1yr-forward-EV/EBITDA, i.e. 40-45% premium vs GEM wireless majors to
allow for stronger long-term growth potential. Stronger than expected 3G revenue
ramp-up, sooner-than-expected industry consolidation and stronger-thananticipated
Indus profitability could present upside to our PO. Significantly higher
competitive intensity in the industry and dramatic regulatory changes pose
downside risks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Idea Cellular Ltd.
Topline risks cast shadow on
tariff upside
�� Topline worries but +ve margin outlook; Maintain Neutral
Idea reported disappointing 2Q results as topline grew only 2% QoQ & EBITDA
contracted 2% QoQ. Post results, our EBITDA for FY12E stands trimmed by ~2%
on tad slower subscriber growth & FY13E stays mostly unchanged; EPS cuts are
sharp due to higher interest & depreciation. We maintain our Neutral rating on the
stock due to positive margin outlook for next 2 quarters & likely postponement of
policy risks, counter-balanced by downside risks to topline. PO stays at Rs100/sh
Weak traffic dragged 2Q; topline remains the major worry
In 2Q FY12, Idea’s traffic contracted 2% QoQ for the first time in recent years.
Idea’s top mgt. attributed this to deeper seasonality owing to rising proportion of
rural subscribers & said recent (Oct ’11) traffic trend was encouraging. We have
left topline estimates unchanged for now but worry that risks are on the downside
Roaming pacts impact 2Q margins; we see room for upside
In 2Q FY12, Idea’s EBITDA margin fell ~110bps QoQ despite a reported 4% QoQ
improvement in revenue per minute (rpm). We estimate that the 2Q margin drop
was accentuated by 3G roaming pacts, assuming reciprocal sharing. Adjusting for
roaming & data uptake, we estimate voice rpm improved ~1% QoQ in 2Q. Over
next 2 qtrs impact of on-net tariff hikes should further lift voice rpm & margins
Mgt highlights: roaming abolition - complex; slow 3G uptake
On its post results call, Idea’s top management said that recent policy vision of
“One India, free roaming” will be complex to implement. On 3G, Idea reported
~2.5mn subs but said that only 30% had seriously used the services. To facilitate
3G adoption, Idea is working to launch own-branded android-based smartphones.
2Q FY12 highlights
Headline profits disappoint on topline and margin weakness: Idea reported
2Q FY12 net profit at Rs1.06bn, down 41% YoY and 40% QoQ. Results were
below consensus and our expectations due to both weaker topline and lower
margins; in 2Q FY12, topline grew 2% QoQ and EBITDA fell 2% QoQ. Reported
PAT was also dragged by Rs313mn of forex loss.
Traffic contracts 2% QoQ: deeper seasonality or elasticity to tariff hikes?
In 2Q FY12, Idea’s total traffic contracted 2% QoQ despite 6% QoQ growth in
average subscriber base. Higher rpm was the key driver of 2% QoQ topline
growth. In 2Q FY12, MoU/sub fell 7% QoQ – the sharpest QoQ drop in recent
years - pointing to deeper seasonality and/or usage elasticity to tariff hikes. 2Q
FY12 appears to be the first time in recent years when Idea witnessed QoQ traffic
contraction.
Sharp improvement in revenue per minute, helped by 3G roaming pacts:
In 2Q, Idea’s overall revenue per minute (rpm) improved 4% QoQ. This reflects a
combination of 3G roaming pacts, improved data uptake (VAS rose 110bps QoQ
to 13.2%) and recent tariff hikes. Assuming that 3G roaming arrangements are on
a reciprocal basis at this stage, we estimate that core voice pricing for Idea
improved ~1% QoQ.
EBITDA margin drop likely accentuated by roaming pacts: Idea’s EBITDA
margin in 2Q FY12 fell 110bps QoQ to 25.5%. We think the margin drop would
have been lower if one adjusted the impact of 3G roaming on topline. 2Q margins
were dragged by higher network costs and increase in employee expenses but
helped by lower SG&A expenses (likely reflecting lower dealer commissions).
Established circle’ margins slip a tad; new circle losses up: In 2Q, Idea’s
established circles witnessed ~4% QoQ decline in ARPU while new circles ARPU
fell 1% QoQ. Overall, Idea’s blended ARPU fell 3% QoQ. Despite relatively higher
ARPU decline, Idea’s established circle margins slipped only a tad (20bps) to
29.4% likely supported by better rpm and lower SG&A. New circle losses rose
sharply from Rs1.4bn in 1Q FY12 to Rs1.8bn in 2Q FY12. Idea said the rise in
new circle losses was primarily due to impact of 3G roaming pacts.
Indus margins improve QoQ despite flat topline: Idea’s results indicate that
its tower-sharing joint venture with Bharti & Vodafone posted ~170bps QoQ
improvement in EBITDA margin to 46.3% despite flat revenues.
Interest expenses up due to forex loss: Interest expense in 2Q FY12 was up
19% QoQ largely due to forex loss of ~Rs313mn.
1H FY12 capex on track versus FY12-guidance: Idea’s 1H FY12 capex
totaled ~Rs21bn (including Rs2.8bn fx adjustment) largely in line with FY12
guidance of Rs40bn.
Management call highlights
Draft NTP-2011 vision of free roaming - complex to implement
Idea believes that the draft telecom policy’s vision statement of moving towards
“free roaming” will be complex to implement and will involve multiple discussions
with operators given the current regime of circle-wise licencing.
3G adoption still slow; 30% activity level as of Sep ‘11
Idea’s 3G subscriber base stood at 2.5mn as of Sep ’11 (2.5% of total sub base)
but the Co said its serious 3G users were far fewer at ~0.75mn for the month of
Sep ’11.
Idea-branded 3G handsets on the anvil
To facilitate faster 3G adoption, Idea is working to launch own-branded androidbased
smartphones. The Co emphasized that it may be able to lower phone
prices through better procurement but has no intention to subsidize handsets.
3G roaming pacts – compliant with law
In the context of reported regulatory scrutiny of 3G roaming pacts, Idea said the
company is fully compliant with existing laws and licence conditions. The Co does
not see any risk to its data/3G offerings.
Price objective basis & risk
Idea Cellular (IDEAF)
Our PO of Rs100/sh for Idea is based on DCF and implies a valuation of around
7-7.5x 1yr-forward-EV/EBITDA, i.e. 40-45% premium vs GEM wireless majors to
allow for stronger long-term growth potential. Stronger than expected 3G revenue
ramp-up, sooner-than-expected industry consolidation and stronger-thananticipated
Indus profitability could present upside to our PO. Significantly higher
competitive intensity in the industry and dramatic regulatory changes pose
downside risks.
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