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All Positives Priced In
We believe Idea Cellular’s stock price outperformance over the past one year is
ahead of fundamentals and the street appears to be over-enthused by the tariff
hikes effected in July 2011. The hikes were undertaken after years of tariff
reduction; we believe margins are unlikely to rise to the extent factored in by
consensus as the hikes are more a reflection of higher costs rather than an
improvement in pricing power. Apart from this, regulatory risks, notably ‘excess
spectrum’ charges and licence renewal knock off Rs29 from our target price. We
assign a Sell rating to Idea Cellular with a target price of Rs75. It should be noted
that our FY13 EPS estimate is 11.9% below consensus estimates.
Stock outperformance ahead of fundamentals: Idea Cellular has outperformed the
Sensex by as much as 39% over the past one year. The tariff hikes effected by the
company have led to optimism about a considerable improvement in margins and
earnings, as reflected in FY13 consensus estimates. However, we believe the tariff
hikes are more a reflection of higher costs rather than improved pricing power and
consequently, our margin forecasts are below consensus. We believe the need to build
3G networks to boost penetration in order to recover the huge investments made in 3G
spectrum is likely to keep network operating costs at a higher level, thereby ensuring
that margin expansion is unlikely to be achieved to the extent factored in by consensus
forecast. We therefore believe the street’s enthusiasm in respect of tariff hike is
overdone and stock price upside owing to this factor is not likely to be significant. Our
FY13 margin estimate is below consensus estimates by 111bps.
Regulatory risks slash Rs29 from our TP, account for 35% of current market-cap:
We believe the current share price does not fully capture regulatory risks, notably
‘excess spectrum’ charges and licence renewal. Idea will have to pay Rs13.3bn for its
‘excess spectrum’ holdings based on the rates recommended by TRAI’s expert
committee, which translates into an impact of Rs4/share. As regards licence renewal, it
will have to pay Rs136bn for renewing its licences over 2015-27 assuming the quantum
of spectrum awarded on renewal is capped at the ‘prescribed limit’ (10MHz for Delhi
and Mumbai and 8MHz for other circles). The current value of this based on a risk-free
rate of 8% amounts to Rs82.7bn (~US$1.57bn), or Rs25/share. Thus, regulatory risks
knock off Rs29 from our target price.
Valuation: We value Idea Cellular based on the SOTP method. We assign an
EV/EBITDA multiple of 5x for its mobility business and EV/tower of Rs4.8mn for its
tower business. We adjust for regulatory risks faced by the company, which knock off
Rs29 from our target price. Thus, the implied equity value comes to Rs249.1bn,
resulting in a target price of Rs75. This implies 9% downside from the CMP. Therefore,
we assign a Sell rating to Idea Cellular with a target price of Rs75.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
All Positives Priced In
We believe Idea Cellular’s stock price outperformance over the past one year is
ahead of fundamentals and the street appears to be over-enthused by the tariff
hikes effected in July 2011. The hikes were undertaken after years of tariff
reduction; we believe margins are unlikely to rise to the extent factored in by
consensus as the hikes are more a reflection of higher costs rather than an
improvement in pricing power. Apart from this, regulatory risks, notably ‘excess
spectrum’ charges and licence renewal knock off Rs29 from our target price. We
assign a Sell rating to Idea Cellular with a target price of Rs75. It should be noted
that our FY13 EPS estimate is 11.9% below consensus estimates.
Stock outperformance ahead of fundamentals: Idea Cellular has outperformed the
Sensex by as much as 39% over the past one year. The tariff hikes effected by the
company have led to optimism about a considerable improvement in margins and
earnings, as reflected in FY13 consensus estimates. However, we believe the tariff
hikes are more a reflection of higher costs rather than improved pricing power and
consequently, our margin forecasts are below consensus. We believe the need to build
3G networks to boost penetration in order to recover the huge investments made in 3G
spectrum is likely to keep network operating costs at a higher level, thereby ensuring
that margin expansion is unlikely to be achieved to the extent factored in by consensus
forecast. We therefore believe the street’s enthusiasm in respect of tariff hike is
overdone and stock price upside owing to this factor is not likely to be significant. Our
FY13 margin estimate is below consensus estimates by 111bps.
Regulatory risks slash Rs29 from our TP, account for 35% of current market-cap:
We believe the current share price does not fully capture regulatory risks, notably
‘excess spectrum’ charges and licence renewal. Idea will have to pay Rs13.3bn for its
‘excess spectrum’ holdings based on the rates recommended by TRAI’s expert
committee, which translates into an impact of Rs4/share. As regards licence renewal, it
will have to pay Rs136bn for renewing its licences over 2015-27 assuming the quantum
of spectrum awarded on renewal is capped at the ‘prescribed limit’ (10MHz for Delhi
and Mumbai and 8MHz for other circles). The current value of this based on a risk-free
rate of 8% amounts to Rs82.7bn (~US$1.57bn), or Rs25/share. Thus, regulatory risks
knock off Rs29 from our target price.
Valuation: We value Idea Cellular based on the SOTP method. We assign an
EV/EBITDA multiple of 5x for its mobility business and EV/tower of Rs4.8mn for its
tower business. We adjust for regulatory risks faced by the company, which knock off
Rs29 from our target price. Thus, the implied equity value comes to Rs249.1bn,
resulting in a target price of Rs75. This implies 9% downside from the CMP. Therefore,
we assign a Sell rating to Idea Cellular with a target price of Rs75.
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