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Strong Q3, but environment challenging
Idea Cellular (Idea) reported strong performance during Q3FY12. While
topline was a tad better than our estimates, the EBITDA margin was lower
than expected at 26.6% (we were slightly bullish on margin expansion for Q3
on RPM increase). We revise our target price lower to Rs82 based on the
revision in EBITDA margin estimates. We expect lower margin expansion as
growth in data services and revenue per minute may happen at a lower rate
that we expected due to circle level competition and uncertainty over
equipment clearance due to security norms. We retain our Hold rating on the
stock with a cautious stance as continuing regulatory risk can dent
profitability and increase pressure on return on equity.
Topline in line; EBITDA margin below estimates: Idea reported 9% QoQ
growth in topline to Rs50.2bn against our estimate of Rs48.47bn. Minutes of
usage bounced back and registered 7.3% QoQ on the back of strong 6.2mn
net addition in subscribers. Revenue per minute (RPM) grew by 1.4% QoQ to
43.3p/min driven by revenue from value added services but voice RPM
remained flat. EBITDA margin expanded by 108bp QoQ to 26.6% (we
expected tariff increase to expand margin) driven by savings from network
cost.
Operational matrix saw mixed performance during Q3: MoU/sub increased
to 369 in Q3 from 364 in Q2FY12 despite strong addition in net subscribers
compared to last quarter. This indicates improvement in usage on Idea
network, but this could not translate into higher voice RPM despite significant
subscribers migrating to newer tariff. Both established and newer circles
showed strong growth and improvement in operating margin. 3G coverage
expanded to 2,300 cities and registered 2.25mn subscribers, giving
incremental ARPU of Rs79.
Concall highlights: Capex guidance was maintained at Rs40bn for FY12
despite spending Rs33.7bn for 9MFY12. The management indicated
competition at circle level and did not see any significant tariff hike in near
term. The management indicated that business environment remained
uncertain at this point of time.
Environment uncertain; Reiterate Hold with a cautious stance: We revise
our estimate marginally to factor in lower than expected margin on account of
higher data related revenue. Hence, we reduce our target price to Rs82 to
factor in earnings revision and risk associated with the sector which can dent
earnings in FY13E. Downside risks are 1) removal of roaming revenue which
can impact profitability; 2) pending recommendation of one-time spectrum
charges, 3G inter circle roaming would put pressure on balance sheet;
3) spectrum pricing and risk of spectrum availability through auction can jack
up spectrum pricing, hurting return ratios again; 4) Slow pace of equipment
clearance due to security norms. Hence, we are cautious on the sector as we
enter a phase where the growth rate of 2G services would come down and
regulatory risk can dent the balance sheet further leading to pressure on
return ratios which are already low.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strong Q3, but environment challenging
Idea Cellular (Idea) reported strong performance during Q3FY12. While
topline was a tad better than our estimates, the EBITDA margin was lower
than expected at 26.6% (we were slightly bullish on margin expansion for Q3
on RPM increase). We revise our target price lower to Rs82 based on the
revision in EBITDA margin estimates. We expect lower margin expansion as
growth in data services and revenue per minute may happen at a lower rate
that we expected due to circle level competition and uncertainty over
equipment clearance due to security norms. We retain our Hold rating on the
stock with a cautious stance as continuing regulatory risk can dent
profitability and increase pressure on return on equity.
Topline in line; EBITDA margin below estimates: Idea reported 9% QoQ
growth in topline to Rs50.2bn against our estimate of Rs48.47bn. Minutes of
usage bounced back and registered 7.3% QoQ on the back of strong 6.2mn
net addition in subscribers. Revenue per minute (RPM) grew by 1.4% QoQ to
43.3p/min driven by revenue from value added services but voice RPM
remained flat. EBITDA margin expanded by 108bp QoQ to 26.6% (we
expected tariff increase to expand margin) driven by savings from network
cost.
Operational matrix saw mixed performance during Q3: MoU/sub increased
to 369 in Q3 from 364 in Q2FY12 despite strong addition in net subscribers
compared to last quarter. This indicates improvement in usage on Idea
network, but this could not translate into higher voice RPM despite significant
subscribers migrating to newer tariff. Both established and newer circles
showed strong growth and improvement in operating margin. 3G coverage
expanded to 2,300 cities and registered 2.25mn subscribers, giving
incremental ARPU of Rs79.
Concall highlights: Capex guidance was maintained at Rs40bn for FY12
despite spending Rs33.7bn for 9MFY12. The management indicated
competition at circle level and did not see any significant tariff hike in near
term. The management indicated that business environment remained
uncertain at this point of time.
Environment uncertain; Reiterate Hold with a cautious stance: We revise
our estimate marginally to factor in lower than expected margin on account of
higher data related revenue. Hence, we reduce our target price to Rs82 to
factor in earnings revision and risk associated with the sector which can dent
earnings in FY13E. Downside risks are 1) removal of roaming revenue which
can impact profitability; 2) pending recommendation of one-time spectrum
charges, 3G inter circle roaming would put pressure on balance sheet;
3) spectrum pricing and risk of spectrum availability through auction can jack
up spectrum pricing, hurting return ratios again; 4) Slow pace of equipment
clearance due to security norms. Hence, we are cautious on the sector as we
enter a phase where the growth rate of 2G services would come down and
regulatory risk can dent the balance sheet further leading to pressure on
return ratios which are already low.
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