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IDEA (IDEA)
Telecom
Modest miss; interesting volume/pricing dynamics. Idea’s 2QFY12 revenues and
EBITDA missed our estimates by 0.5% and 1.7%, respectively – broadly in line. Earnings
report threw some interesting surprises on sequential movement in volume and pricing.
Sequential minutes decline of 2.2% qoq, despite expected seasonality, was a surprise
and so was the 4%+ qoq RPM uptick. We expect sustained pricing improvement for
some time – this should ensure robust revenue growth even as voice volume growth
slows down. Associated margin uptick is likely to drive strong EBITDA growth for the
next couple of years. We retain ADD with an unchanged target price of Rs115/share.
2QFY12 – broadly in-line headline numbers…
Idea’s headline 2QFY12 numbers modestly missed our estimates. Reported consolidated revenues
of Rs46.2 bn (+2.2% qoq, +26.3% yoy) came in 0.5% below our estimate, while reported EBITDA
of Rs11.9 bn (down 1.4% qoq, +35% yoy) missed our estimate by 1.7%. Net income of Rs1.06
bn (down around 40% qoq as well as yoy) was 16% lower than our estimated Rs1.26 bn. The
miss was a flow-through of the EBITDA miss – % miss on net income looks larger given Idea’s high
operating and financial leverage (low PAT/EBITDA ratio).
Standalone wireless revenues of Rs46.6 bn (+2.2% qoq, +26.2% yoy) missed our estimate by
0.8%. Wireless EBITDA margin declined 100 bps qoq to 22.4% as losses in new circles expanded.
Established circle EBITDA was steady qoq.
…but composition surprising
Composition of sequential wireless revenue growth was interesting – the 2.2% qoq revenue
growth came in despite a sharp 2.2% decline in wireless volumes (against our estimate of 2.5%
growth) as RPM increased 4.1% qoq to 42.7 paise/minute. Idea management attributed the
volume decline to pronounced seasonality impact; some seasonality was expected and built into
our estimates – the extent of seasonality impact surprised us. RPM uptick came in on the back of
(1) higher VAS revenue contribution, (2) removal of promotional tariffs and initial impact of recent
base tariff hikes, and (3) 3G roaming revenues arising out of recently-signed intra-circle 3G
roaming agreements between Bharti, Idea, and Vodafone – we take a closer look at the impact of
this in the next page.
Move from volume-led to pricing-led revenue growth should be net positive, in our view
Even as subs growth slowdown in recent months and Idea’s weak 2Q volumes raise valid questions
on potentially decelerating industry volume growth, we believe the industry is moving from
volume-led revenue growth to a pricing-led one. We expect positive pricing momentum to sustain
for a while and expect the same to drive strong EBITDA growth for the incumbents.
Broadly maintain estimates
We incorporate the evolving price/volume dynamics into our forecasts for Idea. As discussed
above, the Indian wireless industry is moving from volume-led revenue growth to a pricingled
one – extent of impact of this move on volumes, margins and capex is tricky to gauge
and we expect our estimates to be more fluid than normal for some time. That said, we now
build in stronger RPM uptick and weaker volume growth for FY2012-14E. Exhibit 1 depicts
the key changes. We broadly maintain our EBITDA estimates for FY2012-14E; retain ADD.
Negative concrete regulatory developments remain the key risk to our call.
2QFY12 RESULTS – DETAILED ANALYSIS
First, a closer look at surprising volume/ pricing moves
Idea reported a 2.2% qoq growth in standalone wireless revenues, a tad lower than our 3%
growth estimate. However, the composition of revenue growth surprised – wireless volumes
declined 2.2% qoq versus our estimate of a 2.5% growth while RPM increased a sharp
4.1% qoq versus our estimated 0.5% uptick. The management attributed volume decline to
pronounced seasonality impact. RPM uptick was on account of
Increased VAS contribution – VAS as a % of revenues increased to 13.2% from 12.1% in
the previous quarter. Non-voice RPM increased to 5.6 paise/minute from 5.0 paise/minute
in 1QFY12.
Removal of promotional tariffs and marginal impact of recent base tariff revision. In
addition to increasing base tariffs for new subs in select circles, Idea also removed several
promotional tariff packs from the market in its established circles during the quarter.
3G roaming revenues – Bharti, Idea, and Vodafone recently signed intra-circle 3G
roaming agreements in various circles, wherein the operator holding 3G spectrum in a
particular circle would provide intra-circle 3G roaming to the other(s), thereby enabling to
offer 3G services to its subs in that circle. Some portion of RPM uptick was clearly driven
by such agreements; we discuss the dynamics of such agreements and their revenue and
cost impact below.
3G roaming agreements impact revenues as well as costs substantially
Reported revenues included contribution from 3G intra-circle roaming revenues that Idea
gained from offering such roaming to Bharti and/or Vodafone in some of its 3G circles.
There was an offsetting cost that Idea paid to these operators in its non-3G circles – this
reflected in the sharp 7.6% qoq jump in interconnect costs, surprising in a quarter with
sequential volume decline. We believe the quantum of impact (on both revenues and costs)
was substantial, even as the management did not quantify the same or share any details on
the commercial construct of these agreements, citing competitive reasons. We believe the
impact was substantial, possibly on account of
‘minimum payout’ contracts – 3G intra-circle roaming agreements could have a minimum
monthly payment clause for up to a certain amount of usage.
Shift of voice usage to the roaming network as well – voice usage of a 2G sub upgrading
to 3G in a non-3G circle of an operator would also shift to the intra-circle roaming
partner’s network, thereby increasing interconnect costs (for the non-3G player) and
interconnect revenues (for the roaming network provider).
Net impact of such agreements could be positive or negative at the EBITDA level depending
on the interconnect revenue and cost dynamics for a particular operator. It is difficult to say
whether the impact was positive or negative for Idea in 2QFY12. However, we do note that
even a neutral EBITDA impact of such agreements would artificially dampen margins – same
EBITDA at higher revenues (offset at the EBITDA level by higher costs), essentially.
Bottom line, underlying RPM uptick in 2QFY12 was not as strong as reported nor was the
underlying wireless margin decline as steep. Annual wage increments did drive some decline
in EBITDA margin; however, this was in line with our estimates. Exhibit 3 depicts the
movement in standalone cost items.
Other wireless metrics – 3G, network rollout, capex
Idea indicated around 2.5 mn 3G subs at end-September 2011, with only about 30% of
these being active users. At end-June 2011, Idea had indicated 2 mn 3G subs with 25%
active users. Active 3G subs increase from 0.5 mn to 0.75 mn is subdued, in our view.
Initial 3G off-take has clearly been below expectations, for nearly all operators. Idea
indicated that it would soon launch an Idea-branded 3G Android handset – it also
indicated that it does not intend to subsidize the device.
Idea rolled out 2,076 2G cell sites during the quarter to take the end-September 2011 2G
cell site count to 78,367. It also expanded its 3G network to 9,744 sites, up from 6,989 at
end-June 2011. The company now claims to have 3G services rolled out in 1,600 towns
across the country – this includes the coverage gained from 3G roaming agreements with
Bharti and Vodafone.
Idea incurred a capex (ex-Indus) of Rs11 bn during the quarter taking 1HFY12 standalone
capex to Rs21 bn. Capex of Rs11 bn for the quarter included Rs2.8 bn impact on account
of Re depreciation. The company maintained its FY2012E standalone capex guidance of
Rs40 bn.
Prepaid churn increased further to 10.1% from1QFY12 levels of 9.8%.
Indus – a weak quarter on revenues, strong one on margin expansion
Indus revenues (consolidated 16% in Idea’s financials) were up a modest 0.4% qoq, while
EBITDA margins expanded 165 bps qoq and 415 bps yoy to 46.3%. Modest growth in Indus
revenues clearly suggests little upside from 3G tenancy, in line with our expectations. We
note that incremental 3G tenancies come in at only a fraction of base rentals (10-20%, per
our channel checks).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IDEA (IDEA)
Telecom
Modest miss; interesting volume/pricing dynamics. Idea’s 2QFY12 revenues and
EBITDA missed our estimates by 0.5% and 1.7%, respectively – broadly in line. Earnings
report threw some interesting surprises on sequential movement in volume and pricing.
Sequential minutes decline of 2.2% qoq, despite expected seasonality, was a surprise
and so was the 4%+ qoq RPM uptick. We expect sustained pricing improvement for
some time – this should ensure robust revenue growth even as voice volume growth
slows down. Associated margin uptick is likely to drive strong EBITDA growth for the
next couple of years. We retain ADD with an unchanged target price of Rs115/share.
2QFY12 – broadly in-line headline numbers…
Idea’s headline 2QFY12 numbers modestly missed our estimates. Reported consolidated revenues
of Rs46.2 bn (+2.2% qoq, +26.3% yoy) came in 0.5% below our estimate, while reported EBITDA
of Rs11.9 bn (down 1.4% qoq, +35% yoy) missed our estimate by 1.7%. Net income of Rs1.06
bn (down around 40% qoq as well as yoy) was 16% lower than our estimated Rs1.26 bn. The
miss was a flow-through of the EBITDA miss – % miss on net income looks larger given Idea’s high
operating and financial leverage (low PAT/EBITDA ratio).
Standalone wireless revenues of Rs46.6 bn (+2.2% qoq, +26.2% yoy) missed our estimate by
0.8%. Wireless EBITDA margin declined 100 bps qoq to 22.4% as losses in new circles expanded.
Established circle EBITDA was steady qoq.
…but composition surprising
Composition of sequential wireless revenue growth was interesting – the 2.2% qoq revenue
growth came in despite a sharp 2.2% decline in wireless volumes (against our estimate of 2.5%
growth) as RPM increased 4.1% qoq to 42.7 paise/minute. Idea management attributed the
volume decline to pronounced seasonality impact; some seasonality was expected and built into
our estimates – the extent of seasonality impact surprised us. RPM uptick came in on the back of
(1) higher VAS revenue contribution, (2) removal of promotional tariffs and initial impact of recent
base tariff hikes, and (3) 3G roaming revenues arising out of recently-signed intra-circle 3G
roaming agreements between Bharti, Idea, and Vodafone – we take a closer look at the impact of
this in the next page.
Move from volume-led to pricing-led revenue growth should be net positive, in our view
Even as subs growth slowdown in recent months and Idea’s weak 2Q volumes raise valid questions
on potentially decelerating industry volume growth, we believe the industry is moving from
volume-led revenue growth to a pricing-led one. We expect positive pricing momentum to sustain
for a while and expect the same to drive strong EBITDA growth for the incumbents.
Broadly maintain estimates
We incorporate the evolving price/volume dynamics into our forecasts for Idea. As discussed
above, the Indian wireless industry is moving from volume-led revenue growth to a pricingled
one – extent of impact of this move on volumes, margins and capex is tricky to gauge
and we expect our estimates to be more fluid than normal for some time. That said, we now
build in stronger RPM uptick and weaker volume growth for FY2012-14E. Exhibit 1 depicts
the key changes. We broadly maintain our EBITDA estimates for FY2012-14E; retain ADD.
Negative concrete regulatory developments remain the key risk to our call.
2QFY12 RESULTS – DETAILED ANALYSIS
First, a closer look at surprising volume/ pricing moves
Idea reported a 2.2% qoq growth in standalone wireless revenues, a tad lower than our 3%
growth estimate. However, the composition of revenue growth surprised – wireless volumes
declined 2.2% qoq versus our estimate of a 2.5% growth while RPM increased a sharp
4.1% qoq versus our estimated 0.5% uptick. The management attributed volume decline to
pronounced seasonality impact. RPM uptick was on account of
Increased VAS contribution – VAS as a % of revenues increased to 13.2% from 12.1% in
the previous quarter. Non-voice RPM increased to 5.6 paise/minute from 5.0 paise/minute
in 1QFY12.
Removal of promotional tariffs and marginal impact of recent base tariff revision. In
addition to increasing base tariffs for new subs in select circles, Idea also removed several
promotional tariff packs from the market in its established circles during the quarter.
3G roaming revenues – Bharti, Idea, and Vodafone recently signed intra-circle 3G
roaming agreements in various circles, wherein the operator holding 3G spectrum in a
particular circle would provide intra-circle 3G roaming to the other(s), thereby enabling to
offer 3G services to its subs in that circle. Some portion of RPM uptick was clearly driven
by such agreements; we discuss the dynamics of such agreements and their revenue and
cost impact below.
3G roaming agreements impact revenues as well as costs substantially
Reported revenues included contribution from 3G intra-circle roaming revenues that Idea
gained from offering such roaming to Bharti and/or Vodafone in some of its 3G circles.
There was an offsetting cost that Idea paid to these operators in its non-3G circles – this
reflected in the sharp 7.6% qoq jump in interconnect costs, surprising in a quarter with
sequential volume decline. We believe the quantum of impact (on both revenues and costs)
was substantial, even as the management did not quantify the same or share any details on
the commercial construct of these agreements, citing competitive reasons. We believe the
impact was substantial, possibly on account of
‘minimum payout’ contracts – 3G intra-circle roaming agreements could have a minimum
monthly payment clause for up to a certain amount of usage.
Shift of voice usage to the roaming network as well – voice usage of a 2G sub upgrading
to 3G in a non-3G circle of an operator would also shift to the intra-circle roaming
partner’s network, thereby increasing interconnect costs (for the non-3G player) and
interconnect revenues (for the roaming network provider).
Net impact of such agreements could be positive or negative at the EBITDA level depending
on the interconnect revenue and cost dynamics for a particular operator. It is difficult to say
whether the impact was positive or negative for Idea in 2QFY12. However, we do note that
even a neutral EBITDA impact of such agreements would artificially dampen margins – same
EBITDA at higher revenues (offset at the EBITDA level by higher costs), essentially.
Bottom line, underlying RPM uptick in 2QFY12 was not as strong as reported nor was the
underlying wireless margin decline as steep. Annual wage increments did drive some decline
in EBITDA margin; however, this was in line with our estimates. Exhibit 3 depicts the
movement in standalone cost items.
Other wireless metrics – 3G, network rollout, capex
Idea indicated around 2.5 mn 3G subs at end-September 2011, with only about 30% of
these being active users. At end-June 2011, Idea had indicated 2 mn 3G subs with 25%
active users. Active 3G subs increase from 0.5 mn to 0.75 mn is subdued, in our view.
Initial 3G off-take has clearly been below expectations, for nearly all operators. Idea
indicated that it would soon launch an Idea-branded 3G Android handset – it also
indicated that it does not intend to subsidize the device.
Idea rolled out 2,076 2G cell sites during the quarter to take the end-September 2011 2G
cell site count to 78,367. It also expanded its 3G network to 9,744 sites, up from 6,989 at
end-June 2011. The company now claims to have 3G services rolled out in 1,600 towns
across the country – this includes the coverage gained from 3G roaming agreements with
Bharti and Vodafone.
Idea incurred a capex (ex-Indus) of Rs11 bn during the quarter taking 1HFY12 standalone
capex to Rs21 bn. Capex of Rs11 bn for the quarter included Rs2.8 bn impact on account
of Re depreciation. The company maintained its FY2012E standalone capex guidance of
Rs40 bn.
Prepaid churn increased further to 10.1% from1QFY12 levels of 9.8%.
Indus – a weak quarter on revenues, strong one on margin expansion
Indus revenues (consolidated 16% in Idea’s financials) were up a modest 0.4% qoq, while
EBITDA margins expanded 165 bps qoq and 415 bps yoy to 46.3%. Modest growth in Indus
revenues clearly suggests little upside from 3G tenancy, in line with our expectations. We
note that incremental 3G tenancies come in at only a fraction of base rentals (10-20%, per
our channel checks).
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