>Idea Cellular (ICICI Securities)

Margins look up

Idea Cellular (Idea) displayed a strong operating performance in Q4FY09, registering in-line consolidated revenues of Rs29.4bn (I-Sec: Rs30bn) including 16% share of Indus Towers (Indus) and 41.09% of Spice. The company positively surprised on the EBITDA margin front owing to savings in subscriber acquisition and SG&A costs as well as Indus consolidation. Idea posted consolidated PAT of Rs2.7bn, which was partly boosted by capitalisation of Rs223mn of forex losses. However, we expect margins to be pressured in FY10 as the company expands into new circles – Orissa, Tamil Nadu and West Bengal. We have revised our FY10E & FY11E estimates upwards 5.8% & 10.5% respectively. The stock currently trades at FY10E P/E of 21.1x and EV/EBITDA of 5.8x. We maintain our HOLD recommendation with revised target price of Rs55.5/share (Rs48.4/share earlier) based on sum-of-the-parts (SOTP) valuations. Though Idea reported impressive results owing to tighter cost control, we recommend investors to wait-&-watch for sustained improvement in operating performance and further clarity on Indus’ financials.

■ In-line revenue growth. Driven by strong net adds of 4.7mn, Idea’s standalone revenues were up 44.2% YoY and 9.2% QoQ to Rs28.6bn. Standalone ARPUs of Rs254 (down 4.5% QoQ) and MoUs of 402 minutes (down 3.3% QoQ) were fairly inline with our estimates.

■ EBITDA margin surprises positively. Despite higher network operating costs due to rise in number of rented sites, standalone EBITDA margin was flat QoQ at 25.9% (I-Sec: 24.2%) on account of savings in other costs. Idea was able to curtail the losses in Mumbai & Bihar to Rs654mn. Consolidated EBITDA margin rose 210bps QoQ to 27.6%, (I-Sec: 23.3%) due to improvement in EBITDA margin of Spice and netting of Indus’ indefeasible right of use (IRU) income from Idea’s share of Indus’ expenses.

■ Indus has >95,000 towers at end-FY09, of which ~75,000 were transferred by its three JV partners and the remaining built by Indus over FY09. Idea’s 16% share of Indus’ revenues and EBITDA amounted to Rs1,870mn and Rs358mn respectively, implying Indus’ Q4FY09 revenues to be Rs11.7bn, Rs2.2bn EBITDA and 19.1% EBITDA margin.

■ Maintain HOLD. The stock currently trades at FY10E P/E of 21.1x and EV/EBITDA of 5.8x. We maintain our HOLD recommendation with revised target price of Rs55.5/share (earlier Rs48.4/share) based on SOTP valuations.

To see full report: IDEA CELLULAR