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Idea Cellular -Positive surprise, future EPS growth tricky…
Idea’s Q3FY11 results beat our estimates by a huge margin. It reported
a topline of | 3955.6 crore against our expectation of | 3821.1 crore,
posting growth of 8.1% QoQ and 25.6% YoY. Consolidated EBITDA
margin was 24.0% against our expectation of 23.3%, aided by strong
margin of 45.8% in Indus Towers. Idea reported EBITDA of | 948.3 crore
(I-direct estimate of | 892.1 crore). PAT for the quarter stood at | 243.1
crore, growing 42.9% YoY. Idea capitalised interest cost of | 124.2
pertaining to 3G related debt. Otherwise, PAT would have registered
YoY de-growth of 30.1%. The financials are not strictly comparable on a
YoY basis since this quarter includes 100% Spice amalgamation.
ƒ Highlights of the quarter
After a seasonally weak Q2, the company reported 0.6% growth in
ARPU to | 168 and 1.8% growth in MoU to 401. ARPM stood at 41.8
paisa falling 1.2% QoQ from 42.3 paisa. Idea added 7.6 million
subscribers in the quarter. The rate of fall in key metrics has
softened, which is quite heartening. The company managed its
operating cost to maintain EBITDA margin at 24.0% even in a
scenario of hyper-intensive competition.
Valuation
Idea continues to surprise us, though this time on the positive side. KPIs
were much better than expected. Going forward, we expect steady
revenue growth to continue. At the CMP of | 69, the stock is valued at
32.5x FY12E EPS. Revenue growth seems to be back on track. However,
once it starts charging 3G related cost to P&L, profitability would take a
beating. Also, clear overcapacity and regulatory concerns in the sector
would remain an overhang. The stock is expected to remain firm due to
industry expectation of consolidation among telecom operators.
Assuming revenue CAGR of 9.2% over FY11E–FY20E and terminal growth
of 3% thereon, we have arrived at a target price of | 55/share for the core
business. We have valued the Indus contribution at | 14/share to arrive at
a target price of | 69/share. We maintain our ADD rating on the stock.
Result Analysis
ƒ Handsome growth in revenues after a seasonally weak quarter
The company reported mobility revenues of | 3953.8 crore over |
3653.6 crore in Q2FY11, registering QoQ growth of 8.7%. The total
minutes on the network grew an impressive 10.2% QoQ while APRM
posted a modest decline of 1.2% to 41.8 paisa.
The company added 7.6 million subscribers growing 10.2% QoQ. The
total number of subscribers at the end of Q3FY11 stands at 81.8
million. Share of VAS increased from 12.9% to 13.0% in Q3FY11. We
expect the share of VAS to further increase post the launch of 3G
services.
ƒ Stable margins
Idea Cellular reported a stable consolidated EBITDA margin of 24.0%
even in a hyper competitive scenario. This was also aided by reversal
of excess provisioning of ~ | 15 crore in network operating cost,
which declined from | 1009.1 crore (27.6% of revenue) in Q2FY11 to |
993.6 crore (25.1% of revenue) in Q3FY11. This compensated for
increased marketing and promotional activity in this quarter. Margins
of Indus Tower increased from 42.1% in the last quarter to 45.8% in
this quarter, providing a cushion to overall margins.
Net interest expense for the consolidated entity declined QoQ due to
lower interest outgo for the standalone operations and higher interest
income. PAT margins stood at 6.1%, up from 4.9% in Q2FY11.
ƒ KPIs
After a seasonally weak quarter, KPIs were expected to improve.
However, the extent of the jump is a positive surprise. After
registering 8.2% decline in ARPU in Q2FY11, ARPU for Q3FY11 grew
0.6% to | 168. Overall minutes on the network increased 10.2% on
account of a similar increase in the subscriber base. MoU improved
1.8% QoQ to 401 from 394 in Q2FY11. The ARPM was down to 41.8
paisa from 42.3 paisa in Q2FY11, implying de-growth of 1.2%.
ƒ Indus
The company reported stagnant revenues of | 277.2 crore as its share
of revenue from Indus Towers. Indus has shown considerable
improvement on the operation front. Idea’s share of EBITDA
increased from | 117.0 crore in Q2FY11 to | 126.9 crore in Q3FY11,
indicating an EBITDA margin of 45.8% as against 42.1% in the last
quarter
Outlook
Idea continues to surprise us though this time on the positive side. KPIs
were much better than expected. With robust subscriber growth of 10.2%
QoQ translating into an equal growth in total minutes on the network and
APRM declining by a mere 1.2% QoQ, the company reported healthy
revenue growth. Also, with effective cost management, Idea maintained
stable EBTIDA margins at 24.0% even as it increased its spend on
promotional activities.
Going forward, we expect the steady revenue growth to continue.
Although we do not perceive MNP to have a major impact on the
industry, Idea is best placed to gain whatever little there is with the
introduction of MNP. Also, the impeding 3G launch could provide further
fillip to revenue growth.
However, once the company starts charging interest cost pertaining to 3G
related debt and amortisation on 3G licenses to P&L, profitability will take
a severe hit. Idea has so far capitalised interest cost to the tune of | 285.3
crore pertaining to loan taken for 3G spectrum fees in 9MFY11. If it was
charged to P&L, the profit for the period would have been down by
45.7%. Since it would be a phased roll out, we expect the company to
charge additional interest cost of | 30 crore and | 460 crore in FY11E and
FY12E, respectively. Similarly, the additional amortisation would be to the
tune of | 15 crore and | 305 crore in FY11E and FY12, respectively.
We have not built in revenues from the launch of 3G services due to lack
of clarity. Also, if the management looks at repaying or refinancing some
of this debt, the combined impact on profitability may not be as steep.
Valuation
At the CMP of | 69, the stock is valued at 32.5x FY12E EPS. Revenue
growth seems to be back on track. However, once it starts charging 3G
related costs to P&L, profitability would take a beating. Also, clear
overcapacity and regulatory concerns in the sector would remain an
overhang. However, the stock is expected to remain firm due to
industry expectation of consolidation among telecom operators.
SOTP based target price of | 70/share
Assuming revenue CAGR of 9.2% over FY11E–FY20E and terminal growth
of 3% thereon, we have arrived at a target price of | 55/share for the core
business. We have valued the Indus contribution at | 14/share to arrive at
a target price of | 69/share. We maintain our ADD rating on the stock.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Idea Cellular -Positive surprise, future EPS growth tricky…
Idea’s Q3FY11 results beat our estimates by a huge margin. It reported
a topline of | 3955.6 crore against our expectation of | 3821.1 crore,
posting growth of 8.1% QoQ and 25.6% YoY. Consolidated EBITDA
margin was 24.0% against our expectation of 23.3%, aided by strong
margin of 45.8% in Indus Towers. Idea reported EBITDA of | 948.3 crore
(I-direct estimate of | 892.1 crore). PAT for the quarter stood at | 243.1
crore, growing 42.9% YoY. Idea capitalised interest cost of | 124.2
pertaining to 3G related debt. Otherwise, PAT would have registered
YoY de-growth of 30.1%. The financials are not strictly comparable on a
YoY basis since this quarter includes 100% Spice amalgamation.
ƒ Highlights of the quarter
After a seasonally weak Q2, the company reported 0.6% growth in
ARPU to | 168 and 1.8% growth in MoU to 401. ARPM stood at 41.8
paisa falling 1.2% QoQ from 42.3 paisa. Idea added 7.6 million
subscribers in the quarter. The rate of fall in key metrics has
softened, which is quite heartening. The company managed its
operating cost to maintain EBITDA margin at 24.0% even in a
scenario of hyper-intensive competition.
Valuation
Idea continues to surprise us, though this time on the positive side. KPIs
were much better than expected. Going forward, we expect steady
revenue growth to continue. At the CMP of | 69, the stock is valued at
32.5x FY12E EPS. Revenue growth seems to be back on track. However,
once it starts charging 3G related cost to P&L, profitability would take a
beating. Also, clear overcapacity and regulatory concerns in the sector
would remain an overhang. The stock is expected to remain firm due to
industry expectation of consolidation among telecom operators.
Assuming revenue CAGR of 9.2% over FY11E–FY20E and terminal growth
of 3% thereon, we have arrived at a target price of | 55/share for the core
business. We have valued the Indus contribution at | 14/share to arrive at
a target price of | 69/share. We maintain our ADD rating on the stock.
Result Analysis
ƒ Handsome growth in revenues after a seasonally weak quarter
The company reported mobility revenues of | 3953.8 crore over |
3653.6 crore in Q2FY11, registering QoQ growth of 8.7%. The total
minutes on the network grew an impressive 10.2% QoQ while APRM
posted a modest decline of 1.2% to 41.8 paisa.
The company added 7.6 million subscribers growing 10.2% QoQ. The
total number of subscribers at the end of Q3FY11 stands at 81.8
million. Share of VAS increased from 12.9% to 13.0% in Q3FY11. We
expect the share of VAS to further increase post the launch of 3G
services.
ƒ Stable margins
Idea Cellular reported a stable consolidated EBITDA margin of 24.0%
even in a hyper competitive scenario. This was also aided by reversal
of excess provisioning of ~ | 15 crore in network operating cost,
which declined from | 1009.1 crore (27.6% of revenue) in Q2FY11 to |
993.6 crore (25.1% of revenue) in Q3FY11. This compensated for
increased marketing and promotional activity in this quarter. Margins
of Indus Tower increased from 42.1% in the last quarter to 45.8% in
this quarter, providing a cushion to overall margins.
Net interest expense for the consolidated entity declined QoQ due to
lower interest outgo for the standalone operations and higher interest
income. PAT margins stood at 6.1%, up from 4.9% in Q2FY11.
ƒ KPIs
After a seasonally weak quarter, KPIs were expected to improve.
However, the extent of the jump is a positive surprise. After
registering 8.2% decline in ARPU in Q2FY11, ARPU for Q3FY11 grew
0.6% to | 168. Overall minutes on the network increased 10.2% on
account of a similar increase in the subscriber base. MoU improved
1.8% QoQ to 401 from 394 in Q2FY11. The ARPM was down to 41.8
paisa from 42.3 paisa in Q2FY11, implying de-growth of 1.2%.
ƒ Indus
The company reported stagnant revenues of | 277.2 crore as its share
of revenue from Indus Towers. Indus has shown considerable
improvement on the operation front. Idea’s share of EBITDA
increased from | 117.0 crore in Q2FY11 to | 126.9 crore in Q3FY11,
indicating an EBITDA margin of 45.8% as against 42.1% in the last
quarter
Outlook
Idea continues to surprise us though this time on the positive side. KPIs
were much better than expected. With robust subscriber growth of 10.2%
QoQ translating into an equal growth in total minutes on the network and
APRM declining by a mere 1.2% QoQ, the company reported healthy
revenue growth. Also, with effective cost management, Idea maintained
stable EBTIDA margins at 24.0% even as it increased its spend on
promotional activities.
Going forward, we expect the steady revenue growth to continue.
Although we do not perceive MNP to have a major impact on the
industry, Idea is best placed to gain whatever little there is with the
introduction of MNP. Also, the impeding 3G launch could provide further
fillip to revenue growth.
However, once the company starts charging interest cost pertaining to 3G
related debt and amortisation on 3G licenses to P&L, profitability will take
a severe hit. Idea has so far capitalised interest cost to the tune of | 285.3
crore pertaining to loan taken for 3G spectrum fees in 9MFY11. If it was
charged to P&L, the profit for the period would have been down by
45.7%. Since it would be a phased roll out, we expect the company to
charge additional interest cost of | 30 crore and | 460 crore in FY11E and
FY12E, respectively. Similarly, the additional amortisation would be to the
tune of | 15 crore and | 305 crore in FY11E and FY12, respectively.
We have not built in revenues from the launch of 3G services due to lack
of clarity. Also, if the management looks at repaying or refinancing some
of this debt, the combined impact on profitability may not be as steep.
Valuation
At the CMP of | 69, the stock is valued at 32.5x FY12E EPS. Revenue
growth seems to be back on track. However, once it starts charging 3G
related costs to P&L, profitability would take a beating. Also, clear
overcapacity and regulatory concerns in the sector would remain an
overhang. However, the stock is expected to remain firm due to
industry expectation of consolidation among telecom operators.
SOTP based target price of | 70/share
Assuming revenue CAGR of 9.2% over FY11E–FY20E and terminal growth
of 3% thereon, we have arrived at a target price of | 55/share for the core
business. We have valued the Indus contribution at | 14/share to arrive at
a target price of | 69/share. We maintain our ADD rating on the stock.
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