idea Cellular: Sound fundamentals but auctions a risk… :: ICICI Securities, report

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Sound fundamentals but auctions a risk… • Revenues came in at | 8017.5 crore, up 21.2% YoY and 5.9% QoQ led by impressive growth in data and voice. Data revenues grew 19.1% QoQ to | 1246.9 crore with data realisation increasing to 26.9 paisa from 26.5 paisa in Q2FY15. The voice volume growth of 5.1% QoQ to 170.7 billion minutes also aided revenues. The data volume grew 16.9% QoQ to 46.0 billion MB from 39.4 billion MB • EBITDA came in at | 2752.6 crore higher than estimates of | 2695.5 crore, up 10.5% QoQ (up 33.9% YoY) aided by lower expenses • PAT came in at | 767.1 crore, lower due to higher-than-expected depreciation of | 1482.6 crore. The PAT could have been lower but for higher other income of | 132.6 crore Quarterly drop in voice ARPM due to higher growth in newer circles Due to intense competition, Idea’s ARPM declined to 41 paisa in FY13 from about 53 paisa in FY11. However, with the quashing of 122 licenses by the Supreme Court and marginal operators reducing their scale of operations, telcos started to gain pricing power, reflected in a steady up tick in ARPM. In the quarter, the QoQ growth of 0.9% in ARPM to 46.3 paisa could have been higher but for the 1.5% decline in the voice ARPM to 35.6 paisa owing to higher growth from newer circles. Going ahead, the ARPMs will be buoyed by data growth and consistent voice volumes. We expect blended ARPM to expand to 48.6 and 50.3 paisa in FY16E and FY17E, respectively. Data to be growth driver in coming years Voice volume grew 10.7% to 587.8 billion minutes in FY14 whereas data volume has grown 119.4% to 79.3 billion MB. Also, the data in the quarter reached 11.5% of mobility revenue, up from 6.6% in Q4FY13. Going ahead, we expect data revenue to grow at 52.7% FY14-17E CAGR to | 8281.5 crore, forming 21.7% of mobility revenues. Idea reversed the trend of a decline in data realisation by posting growth since the past few quarters, reaching 26.9 paisa. However, we believe the realisations per MB would remain flat as the industry strives towards data volumes. Data volumes may grow at 60.3% CAGR in FY14-17E to 326 billion MB. Spectrum auctions remain a risk, freed 2100 MHz spectrum a solace Idea has spectrum expiring in about nine circles, which form more than 70% of its revenues as per FY14. Though with the rights issue and private placement aggregating | 3750 crore, the company is financially ready for the auctions, the scenario of overbidding could aggravate its spectrum payouts. We expect a minimum outlay of about | 16000 crore in the upcoming auctions. However, there could be significant upside to our spectrum payout estimates depending on the bidding situation in the auctions. Nevertheless, we also believe that Idea having procured spectrum in some of its expiring circles (February 2014) in the 1800 MHz band in some of its expiring auctions will take a calibrated approach if the auctions get aggressive. It may look forward to procuring spectrum in the 2100 MHz for its data offerings (freed from defence to be auctioned later). Operationally strong but impending auctions a concern; maintain HOLD Operationally, the company continues to post robust voice and data volume growth. We expect revenue and PAT to grow at 13.1% and 47.4% CAGR (FY14-17E), respectively. The upcoming auctions, however, are a risk to the stock. There could be upsides to our estimates. Hence, we maintain HOLD with a target price of | 170.

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