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Idea Cellular Ltd (IDEA)
Upgrade to OW: Well placed to benefit from voice market
3Q was an operationally strong quarter with revenue growth of
c10% in both new and established circles
Benefits from subscriber growth to continue; tariff hikes and
minutes from recently-acquired subscribers to drive growth
We upgrade to OW from N and raise TP from INR97 to INR104
on higher subscriber estimates
3Q numbers beat estimates. Key positive was c7% growth in minutes this quarter supported
by c7.5m net active subscriber additions (vs 3.2m in the previous quarter) and marginal
improvement in revenue per minute, up c1.2%. Additionally, ARPU improved by c3% q-o-q
and VAS revenues improved by c12% q-o-q. Revenue growth from new circles was c11% and
old circles c9 %( without increase in absolute EBITDA loss in new circles), suggesting Idea is
very likely to record revenue market share gains. Margin expanded by 120bp on account of
minute’s growth.
Tariff hikes intact, growth to come from new subscriber usage and gross additions.
While there are concerns about the sustainability of the base tariff hikes (June last year) any
roll back is unlikely in our view. The primary drivers for those hikes remain: the sector’s
balance sheet continues to be stretched and funding remains tough. Separately, tariff pressures
occur mainly in the acquisition bucket and somewhat in the special tariff voucher segment but
not overall. We estimate that there are c100m subscribers who are value seekers and put
pressure on the acquisition segment tariffs, causing disruption. However, the remaining 500m
active subscribers are stable and base tariff hikes apply to this segment, and should drive
growth in realized rates. As per our analysis, c55% of Idea’s subscriber base is stable and
should allow for improvement in realized rates. Further, Idea is well placed to benefit from
subscriber growth in rural markets given its 900MHz spectrum. Additionally, c30% of Idea’s
subscriber base was added in the last 12 months, given the lag between acquisition and usage,
this segment is likely to drive revenue and traffic growth.
Valuation and risks. We raise FY13e EPS by c5% on the back of our subscriber estimates up
c12%, offsetting a 1% cut in revenue per minute given pressures in the acquisition segment.
Our target price increases to INR104 from INR97 (FY13e PE of 27x and EV/EBITDA of
6.9x.) and we upgrade to OW from Neutral. We value the core business at INR97 per share,
the tower business at INR21 and subtract INR15/share to factor in the negative impact of
TRAI recommendations. Higher than estimated regulatory levies, rollback of base tariffs is the
key downside risk. Pricing strategy by Tata Docomo going forward is crucial, if cost cutting
efforts do not lead to a turnaround for the company, tariff pressures could increase in our view
and this is a key downside risk for the sector overall.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Idea Cellular Ltd (IDEA)
Upgrade to OW: Well placed to benefit from voice market
3Q was an operationally strong quarter with revenue growth of
c10% in both new and established circles
Benefits from subscriber growth to continue; tariff hikes and
minutes from recently-acquired subscribers to drive growth
We upgrade to OW from N and raise TP from INR97 to INR104
on higher subscriber estimates
3Q numbers beat estimates. Key positive was c7% growth in minutes this quarter supported
by c7.5m net active subscriber additions (vs 3.2m in the previous quarter) and marginal
improvement in revenue per minute, up c1.2%. Additionally, ARPU improved by c3% q-o-q
and VAS revenues improved by c12% q-o-q. Revenue growth from new circles was c11% and
old circles c9 %( without increase in absolute EBITDA loss in new circles), suggesting Idea is
very likely to record revenue market share gains. Margin expanded by 120bp on account of
minute’s growth.
Tariff hikes intact, growth to come from new subscriber usage and gross additions.
While there are concerns about the sustainability of the base tariff hikes (June last year) any
roll back is unlikely in our view. The primary drivers for those hikes remain: the sector’s
balance sheet continues to be stretched and funding remains tough. Separately, tariff pressures
occur mainly in the acquisition bucket and somewhat in the special tariff voucher segment but
not overall. We estimate that there are c100m subscribers who are value seekers and put
pressure on the acquisition segment tariffs, causing disruption. However, the remaining 500m
active subscribers are stable and base tariff hikes apply to this segment, and should drive
growth in realized rates. As per our analysis, c55% of Idea’s subscriber base is stable and
should allow for improvement in realized rates. Further, Idea is well placed to benefit from
subscriber growth in rural markets given its 900MHz spectrum. Additionally, c30% of Idea’s
subscriber base was added in the last 12 months, given the lag between acquisition and usage,
this segment is likely to drive revenue and traffic growth.
Valuation and risks. We raise FY13e EPS by c5% on the back of our subscriber estimates up
c12%, offsetting a 1% cut in revenue per minute given pressures in the acquisition segment.
Our target price increases to INR104 from INR97 (FY13e PE of 27x and EV/EBITDA of
6.9x.) and we upgrade to OW from Neutral. We value the core business at INR97 per share,
the tower business at INR21 and subtract INR15/share to factor in the negative impact of
TRAI recommendations. Higher than estimated regulatory levies, rollback of base tariffs is the
key downside risk. Pricing strategy by Tata Docomo going forward is crucial, if cost cutting
efforts do not lead to a turnaround for the company, tariff pressures could increase in our view
and this is a key downside risk for the sector overall.
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