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Idea’s sharp bottom-line miss in Q2 reflects a weak operational performance
and was also somewhat impacted by higher D&A and net interest expenses.
While we welcome the healthy 4% ARPM increase, we don’t dismiss the
possibility that the 7% decline in MOU suggests both seasonality and
elasticity within Idea’s sub base to the tariff hikes. We're disappointed with
the decline in margins in Idea's new circles and we don’t expect a quick
recovery here. We would be looking for a favorable resolution of regulatory
issues or a better entry point to turn more positive on Idea. Maintain N.
Elasticity an issue? While Idea added above industry subs in the quarter
(monthly aver net adds -10% Q/Q vs. -33% for the GSM market), its MOU
declined 7% Q/Q driving a 2pp+ decline in total volumes. While seasonality
is strong in Q2, we don’t dismiss the impact of elasticity to increased tariffs.
ARPM increased by 4% Q/Q driven by higher VAS, roaming revenue but
also the tariff hikes (voice ARPM increased 3pp on our estimates).
Margin weakness a concern: Consolidated EBITDA margin declined Q/Q
despite the 1.7pp improvement at Indus. In Idea’s established circles,
margin declined by 20bp to 39.4% while in its new circles it declined by
6.7pp to -35.7% breaking a six-quarter trend of improving margins here.
Forecast changes: We have changed our FY12/FY13 revenue estimate by
+0.9%/-2.3% while our margin estimate is now lower by 30bps/60bps.
FY12/FY13 EPS is now INR 2.5/3.6 vs. INR 2.9/4.5 earlier.
Revised regulatory impact: We have revised our estimate for the
quantified impact of regulations to -Rs20/share from -Rs13/share earlier
driven by [a] a smaller estimated benefit from lower license fee and [b] to
account for the higher spectrum usage charge already provided for.
Our new Mar-12 price target is Rs 81 (earlier Rs87). It is based on a DCF
of Idea’s core business, Indus Towers and Rs20 downward regulationrelated
adjustment. Idea trades at 6.7x FY13E EV/EBITDA, implying 7%
premium to Bharti. Key risks: [upside] monetization of tower assets,
potential M&A activity [downside] unfavorable regulations outcome, new
circles drag.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Idea’s sharp bottom-line miss in Q2 reflects a weak operational performance
and was also somewhat impacted by higher D&A and net interest expenses.
While we welcome the healthy 4% ARPM increase, we don’t dismiss the
possibility that the 7% decline in MOU suggests both seasonality and
elasticity within Idea’s sub base to the tariff hikes. We're disappointed with
the decline in margins in Idea's new circles and we don’t expect a quick
recovery here. We would be looking for a favorable resolution of regulatory
issues or a better entry point to turn more positive on Idea. Maintain N.
Elasticity an issue? While Idea added above industry subs in the quarter
(monthly aver net adds -10% Q/Q vs. -33% for the GSM market), its MOU
declined 7% Q/Q driving a 2pp+ decline in total volumes. While seasonality
is strong in Q2, we don’t dismiss the impact of elasticity to increased tariffs.
ARPM increased by 4% Q/Q driven by higher VAS, roaming revenue but
also the tariff hikes (voice ARPM increased 3pp on our estimates).
Margin weakness a concern: Consolidated EBITDA margin declined Q/Q
despite the 1.7pp improvement at Indus. In Idea’s established circles,
margin declined by 20bp to 39.4% while in its new circles it declined by
6.7pp to -35.7% breaking a six-quarter trend of improving margins here.
Forecast changes: We have changed our FY12/FY13 revenue estimate by
+0.9%/-2.3% while our margin estimate is now lower by 30bps/60bps.
FY12/FY13 EPS is now INR 2.5/3.6 vs. INR 2.9/4.5 earlier.
Revised regulatory impact: We have revised our estimate for the
quantified impact of regulations to -Rs20/share from -Rs13/share earlier
driven by [a] a smaller estimated benefit from lower license fee and [b] to
account for the higher spectrum usage charge already provided for.
Our new Mar-12 price target is Rs 81 (earlier Rs87). It is based on a DCF
of Idea’s core business, Indus Towers and Rs20 downward regulationrelated
adjustment. Idea trades at 6.7x FY13E EV/EBITDA, implying 7%
premium to Bharti. Key risks: [upside] monetization of tower assets,
potential M&A activity [downside] unfavorable regulations outcome, new
circles drag.
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