Sunday, January 29, 2012

>IDEA CELLULAR LIMITED: Strong Q3, but environment challenging

Idea Cellular (Idea) reported strong performance during Q3FY12. While topline was a tad better than our estimates, the EBITDA margin was lower than expected at 26.6% (we were slightly bullish on margin expansion for Q3 on RPM increase). We revise our target price lower to Rs82 based on the revision in EBITDA margin estimates. We expect lower margin expansion as growth in data services and revenue per minute may happen at a lower rate that we expected due to circle level competition and uncertainty over equipment clearance due to security norms. We retain our Hold rating on the stock with a cautious stance as continuing regulatory risk can dent profitability and increase pressure on return on equity.

 Topline in line; EBITDA margin below estimates: Idea reported 9% QoQ growth in topline to Rs50.2bn against our estimate of Rs48.47bn. Minutes of usage bounced back and registered 7.3% QoQ on the back of strong 6.2mn net addition in subscribers. Revenue per minute (RPM) grew by 1.4% QoQ to 43.3p/min driven by revenue from value added services but voice RPM remained flat. EBITDA margin expanded by 108bp QoQ to 26.6% (we expected tariff increase to expand margin) driven by savings from network cost.

■ Operational matrix saw mixed performance during Q3: MoU/sub increased to 369 in Q3 from 364 in Q2FY12 despite strong addition in net subscribers compared to last quarter. This indicates improvement in usage on Idea network, but this could not translate into higher voice RPM despite significant subscribers migrating to newer tariff. Both established and newer circles showed strong growth and improvement in operating margin. 3G coverage expanded to 2,300 cities and registered 2.25mn subscribers, giving incremental ARPU of Rs79.

 Concall highlights: Capex guidance was maintained at Rs40bn for FY12 despite spending Rs33.7bn for 9MFY12. The management indicated competition at circle level and did not see any significant tariff hike in near term. The management indicated that business environment remained uncertain at this point of time.

■ Environment uncertain; Reiterate Hold with a cautious stance: We revise our estimate marginally to factor in lower than expected margin on account of higher data related revenue. Hence, we reduce our target price to Rs82 to factor in earnings revision and risk associated with the sector which can dent earnings in FY13E. Downside risks are 1) removal of roaming revenue which can impact profitability; 2) pending recommendation of one-time spectrum

charges, 3G inter circle roaming would put pressure on balance sheet; 3) spectrum pricing and risk of spectrum availability through auction can jack up spectrum pricing, hurting return ratios again; 4) Slow pace of equipment clearance due to security norms. 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.

To read the full report: IDEA CELLULAR LIMITED