>IDEA CELLULAR LIMITED: Q1FY13 Result Update

Competition keeps RPM low


Idea Cellular’s (Idea) Q1FY13 was a tad lower than our expectation and also that of the street. While we were lowest in terms of revenue estimation, it was better than our estimates due to adjustments in revenue recognition in the tower segment (Indus). Net profit was down due to lower EBITDA margin, higher interest expenses and oneoffs. We maintain our neutral rating considering 1) prevailing competition in the industry which is resulting in pressure on revenue per minutes (RPM) to maintain market share and 2) regulatory uncertainty and its likely pressure on Idea Cellular.


Lower than expected Q1 performance: As against our revenue expectation of Rs54.45bn, the revenue (reported) was up 2.9% QoQ to Rs55bn on the back of 1) 5.3% QoQ minutes of usage growth of 131bn min.; 2) 2.4% QoQ revenue per minute decline (lower than our expectation of 1%) and 3) adjustment in revenue recognition of Indus towers (now Indus reports revenue on gross basis including power fuel charges). Net profit was lower than our expectation by 22.4% QoQ to Rs2.3bn due to lower EBITDA margin, higher depreciation and interest expenses. The company changed the asset duration resulting in higher depreciation to the tune of Rs480mn and reported forex loss of Rs245mn.


Established circles showed expansion in margin: Revenue growth was 2.2% QoQ (lower than the voice business growth of 2.5% QoQ) on the back of minutes of usage growth. EBITDA margin improved 121bp to 31.7% on the back of scale benefit in our opinion.


Minutes of usage coming in at a price: Subscriber addition of 4.5mn in Q1FY13 was the weakest in the last 11 quarters. Minutes of usage growth of 5.3% QoQ to 131bn min was on the back of 2.4% QoQ to 41.2paise.



Concall highlights: The competitive intensity is high among players. The management expects losses to continue in newer circles as the gestation period has elongated in the current environment. The company is working on improving data services revenue by focusing on new delivery platforms and increasing 3G penetration. During Q1FY13, the incremental ARPU from 3G was Rs88 with subs base of 3.1mn. Capex guidance for FY13E remains at Rs35bn and changes in depreciation policy would result in increase in depreciation by Rs1.8bn.


Earnings revision: We have revised our earnings estimate to factor in changes in accounting adjustments during the quarter such as tower business revenue recognition and depreciation expenses.


Upside capped, maintain Neutral rating on stock: We believe that the current valuation of 6.1x FY13E and 4.7x FY14E EV/EBITDA captures the growth potential and regulatory challenges would restrict stock outperformance in our opinion. We maintain our Neutral rating on the stock. Risk to our call would be an increase in revenue per share in 2G voice that could lead to outperformance in stock. However, we do not foresee this in the near term as the competitive intensity is high and there is regulatory uncertainty.


RISH TRADER