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UBS Investment Research
Idea Cellular
Pricing improves
„ Event: Strong results once again; Margins ahead of expectations
Idea Cellular 1QFY12 consolidated revenues at Rs45.2b came in largely inline
while EBITDA at Rs12b was ahead of UBS-e and consensus (Rs10.8b) mainly due
to improvement in mobile margins, as company benefited from increasing scale,
and higher contribution from Indus. Net income at Rs1.8bn was inline with UBS-e.
3G related expenses (D&A, interest expense) impacted net income by Rs1.9b in
the quarter. The minutes growth remained healthy at 6.5% vs. UBS-e 7.2%.
„ Impact: Estimates under review
The biggest positive was voice rev/min (at Rs0.37/sec) improving by 0.5% (vs.
UBS-e of decline of 1.9%) after being under pressure for the last 8 quarters. The
improvement in rev/min was due to rationalisation of promotional offers. In the
light of improving realizations and margins, we are currently reviewing our
estimates. The company mentioned that it has also increased on-net tariffs in 6
service areas, where it is dominant, to 1.2p/sec vs 1p/sec currently.
„ Action: Idea is our top pick in the Indian mobile sector
We believe India mobile sector is going through transformational shift with leading
players increasing tariffs as the current pricing is not sustainable. We believe that
improving pricing environment and regulatory outlook will lead to rerating of the
sector. We expect Idea to benefit the most given it’s a pure play on the sector.
„ Valuation: Maintain Buy rating with SoTP based PT of Rs100
We value Idea at Rs93, Idea’s share in Indus at Rs20 and also incorporate a charge
of Rs13 towards one time spectrum fees and spectrum renewal fees.
Key takeaways from the conference call
Q The increase in voice revenue per minute in 1QFY12 (after being on
downward trajectory in the last 8 quarters) was primarily led by
rationalization of promotional offers. In addition, the management
highlighted that reduction in gross subscriber addition in the quarter also led
to the improvement in realization rates as lower run rate meant lower free
minutes.
Q Idea has increased on-net call rates from 1p/sec to 1.2p/sec in 6 of its
established circles for new and renewing customers. Management said that it
will closely monitor the impact of rate increase on minutes of usage and
revenue market share in these 6 service areas and will respond on pricing
strategy accordingly.
Q The company mentioned that the impact of tariff hike on financials will be
gradual as subscribers’ transition to new billing rates will happen in a phased
manner.
Q Idea believes that the current tariff plans are not sustainable for the industry
as Indian telecom sector is seeing significant cost pressures especially post
3G and BWA auction.
Q Idea expects new telecom policy (NTP-2011) to provide guidelines on
spectrum trading, spectrum transfer policy and M&A guidelines.
Q Management believes 3G would be next growth driver in Indian telecom
sector and is consolidating backhaul capabilities for seamless delivery of
higher bandwidth.
Q Idea currently has 2m 3G subscribers, however only 20-30% of subscribers
are active. Management believes that 8% of its subscribers have 3G enabled
smart phones.
Q The company mentioned that current 2G data tariff plans are not sustainable
levels and they gradually need to be converged with 3G data tariff plans.
Q Operating margins improved in the quarter as the business scale continues to
improve with robust minutes growth.
Q Idea is the leader in MNP with a net gain of 930,000 subscribers. The
company has lowest port-out ratio with only 58 port-outs for every 100 portins.
Q The company maintained its FY12 capex guidance of Rs40bn.
Q Tax rate moved up in the quarter as tax holiday for old service areas (Pre
1999) expired during the quarter. Management expects tax rate to be 30-32%
going forward.
Q Idea Cellular
Idea Cellular is a GSM mobile operator in India with a nationwide subscriber
base of 43.0m (including Spice) for a market share of 11.1% as of March 2009.
The company operates in 16 of 22 service areas in India and has access to 900
MHz spectrum in nine of 16 service areas. The company is part of the Aditya
Birla Group.
Q Statement of Risk
Irrational competition among operators presents the biggest industry specific
risk factor for Idea Cellular. In terms of company-specific risks, we identify the
following: new circle strategies, and Idea’s ability to scale up to meet
burgeoning demand in the Indian mobile sector.
There is low visibility for capex associated with the new circles as it will depend
on the amount of spectrum allocated as well as which circles are likely to be
allocated spectrum.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Idea Cellular
Pricing improves
„ Event: Strong results once again; Margins ahead of expectations
Idea Cellular 1QFY12 consolidated revenues at Rs45.2b came in largely inline
while EBITDA at Rs12b was ahead of UBS-e and consensus (Rs10.8b) mainly due
to improvement in mobile margins, as company benefited from increasing scale,
and higher contribution from Indus. Net income at Rs1.8bn was inline with UBS-e.
3G related expenses (D&A, interest expense) impacted net income by Rs1.9b in
the quarter. The minutes growth remained healthy at 6.5% vs. UBS-e 7.2%.
„ Impact: Estimates under review
The biggest positive was voice rev/min (at Rs0.37/sec) improving by 0.5% (vs.
UBS-e of decline of 1.9%) after being under pressure for the last 8 quarters. The
improvement in rev/min was due to rationalisation of promotional offers. In the
light of improving realizations and margins, we are currently reviewing our
estimates. The company mentioned that it has also increased on-net tariffs in 6
service areas, where it is dominant, to 1.2p/sec vs 1p/sec currently.
„ Action: Idea is our top pick in the Indian mobile sector
We believe India mobile sector is going through transformational shift with leading
players increasing tariffs as the current pricing is not sustainable. We believe that
improving pricing environment and regulatory outlook will lead to rerating of the
sector. We expect Idea to benefit the most given it’s a pure play on the sector.
„ Valuation: Maintain Buy rating with SoTP based PT of Rs100
We value Idea at Rs93, Idea’s share in Indus at Rs20 and also incorporate a charge
of Rs13 towards one time spectrum fees and spectrum renewal fees.
Key takeaways from the conference call
Q The increase in voice revenue per minute in 1QFY12 (after being on
downward trajectory in the last 8 quarters) was primarily led by
rationalization of promotional offers. In addition, the management
highlighted that reduction in gross subscriber addition in the quarter also led
to the improvement in realization rates as lower run rate meant lower free
minutes.
Q Idea has increased on-net call rates from 1p/sec to 1.2p/sec in 6 of its
established circles for new and renewing customers. Management said that it
will closely monitor the impact of rate increase on minutes of usage and
revenue market share in these 6 service areas and will respond on pricing
strategy accordingly.
Q The company mentioned that the impact of tariff hike on financials will be
gradual as subscribers’ transition to new billing rates will happen in a phased
manner.
Q Idea believes that the current tariff plans are not sustainable for the industry
as Indian telecom sector is seeing significant cost pressures especially post
3G and BWA auction.
Q Idea expects new telecom policy (NTP-2011) to provide guidelines on
spectrum trading, spectrum transfer policy and M&A guidelines.
Q Management believes 3G would be next growth driver in Indian telecom
sector and is consolidating backhaul capabilities for seamless delivery of
higher bandwidth.
Q Idea currently has 2m 3G subscribers, however only 20-30% of subscribers
are active. Management believes that 8% of its subscribers have 3G enabled
smart phones.
Q The company mentioned that current 2G data tariff plans are not sustainable
levels and they gradually need to be converged with 3G data tariff plans.
Q Operating margins improved in the quarter as the business scale continues to
improve with robust minutes growth.
Q Idea is the leader in MNP with a net gain of 930,000 subscribers. The
company has lowest port-out ratio with only 58 port-outs for every 100 portins.
Q The company maintained its FY12 capex guidance of Rs40bn.
Q Tax rate moved up in the quarter as tax holiday for old service areas (Pre
1999) expired during the quarter. Management expects tax rate to be 30-32%
going forward.
Q Idea Cellular
Idea Cellular is a GSM mobile operator in India with a nationwide subscriber
base of 43.0m (including Spice) for a market share of 11.1% as of March 2009.
The company operates in 16 of 22 service areas in India and has access to 900
MHz spectrum in nine of 16 service areas. The company is part of the Aditya
Birla Group.
Q Statement of Risk
Irrational competition among operators presents the biggest industry specific
risk factor for Idea Cellular. In terms of company-specific risks, we identify the
following: new circle strategies, and Idea’s ability to scale up to meet
burgeoning demand in the Indian mobile sector.
There is low visibility for capex associated with the new circles as it will depend
on the amount of spectrum allocated as well as which circles are likely to be
allocated spectrum.
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