>IDEA CELLULAR (CITI)

Sell: 1Q Follows The Trend; Weak MOU, Higher Margins, Churn Up

■ In-line EBITDA despite lower revenue growth — Idea’s 1QFY10 EBITDA at Rs7.7bn (+8% yoy, +4% qoq) came exactly in-line with expectations. The slight disappointment in top-line (net revenue growth of 5.3% qoq, in-line with Bharti) was offset by the 80bps EBITDA margin expansion. Margins expanded as a result of termination cut and relatively stable SG&A. However, PAT was
slightly ahead due to lower depreciation and finance charges (attributable to forex gains), although the tax rate at 5% came in higher than expected.

■ KPI trend was in line with Bharti — 5p rev/min decline was as expected, with termination cut contributing 3p. However, MOU dipped 1% qoq, likely due to the competition’s free min offer and slower usage ramp up of rural subs. Overall, ARPUs dipped 9% qoq, with half of that coming from the termination fee cut.

■ Churn continues to go up — Pre-paid churn continued to rise, reaching an alarmingly high level of 6.9% in 1Q (5.3% in 4Q). The increase was much higher than that witnessed for Bharti (3.2% going to 3.5%) and is possibly a reflection of new circles in Idea’s footprint. Incidentally, Spice’s churn was even higher at 9.1% in the quarter.

■ New launches had limited impact on EBITDA, will be a drag in 2Q — EBITDA losses in new circles (TN, Orissa launched in 1Q in addition to the existing new circles of Mumbai/Bihar) remained stable qoq. However, the full impact of new launches will only be felt in 2Q as: (i) the TN launch was in mid-1Q, and (ii) higher rollout increases the costs gradually over 3-6 months from the launch.

To see full report: IDEA CELLULAR