Tuesday, May 1, 2012

>IDEA CELLULAR LIMITED: Another strong quarter, but faces regulatory risk (Q4FY12 Results update)

Idea Cellular (Idea) reported strong performance during Q4FY12. Both topline and EBITDA margin were in line. However, the minutes of usage growth was higher than our expectation which came in at the cost of lower revenue per minutes. Idea Cellular has proved to be a strong voice player over the six quarters with consistent gain in market share of 150bp to 14.5%. While the growth rate has been strong, regulatory risk has gone up for Idea which can dent return ratios and margins. We believe the recent TRAI recommendation (dated 23rd April 2012) has led to concerns over the business model and its impact could be as severe as Rs55/share for Idea as against Rs20/share considered in our earlier assumptions. We are maintaining our Hold rating on the stock after considering the risk associated with it. We have also rolled over to FY14E for valuation and arrive at a target price of Rs74 per share after factoring in risks.

  Topline in line; EBITDA margin below estimates due to one-offs: Idea reported 6.5% QoQ growth in topline to Rs53.4bn against our estimate of Rs53bn. Minutes of usage registered strong 9.1% QoQ on the back of equally strong 6.3mn net addition in subscribers and lower tariff benefits to consumers. Revenue per minute (RPM) declined by 2.5% QoQ to 42.2p/min despite improvement in the share of value added services. EBITDA margin expanded by ~74bp QoQ to 27.3% after adjusting for Rs1.3bn (our estimate of one-off regulatory expenses). This was driven by lower SG&A expenses and marginally lower churn rate.

  Operational matrix saw mixed performance during Q4: MoU/sub increased to 379 in Q4 from 369 in Q3FY12 on strong addition in net subscribers compared to the last quarter. This indicates improvement in usage on Idea network and support from lower voice RPM (decline of 2.7% QoQ). Decline in RPM can be attributed to an increase in competition wherein players are opting for lower tariffs and higher commissions to gain market share. Both established and newer circles showed strong growth and improvement in operating margin. 3G coverage expanded to 3,000 cities and registered 2.6mn subscribers, giving incremental ARPU of Rs91 vs Rs79 in Q3FY12.

 Concall highlights: The management guided for Rs35bn capex for FY13. The competition at the circle level still exists leading to pressure on revenue per minutes and dealer commissions.

 Environment becoming weaker; Reiterate Hold with a cautious stance: Recent TRAI recommendation has increased the risk factor for the industry. There is a strong indication of 1) spectrum pricing going higher than 3G price levels; 2) spectrum re-farming and 3) 2G roaming price going away under One India plan. Risks to our target price are - 1) Reduction in reserve price by Department of Telecom and 2) Hike in tariff. Hence, we are cautious on the sector as we enter a phase where the growth rate of 2G services would come down and regulatory risk can dent the balance sheet further leading to pressure on return ratios which are already low. We reduce our target price to Rs74 (previously Rs82) despite rolling over to FY14E for valuation.