Analyst Research Report Snapshot

Title:

Idea Cellular (IDEA) - Qtr. Update - Dated - April 26, 2013

Price:

$58.00

Provider:

Axis Capital Limited

Date:

27 Apr 2013

Pages:

6

Type:

AcrobatPDF

Companies referenced:

IDEA.NS

Available for Immediate Download
Summary:

Idea’s significant beat on volume and margin strengthens our stance that Indian telecom sector is set for consolidation and old operators will see return of pricing power. We expect Idea’s volume growth to sustain led by declining churn, reduction in multiple SIMs, and gradual increase in market share. Growth in voice revenue will be supplemented by data, which is set to accelerate (up 13% QoQ in Q4) as penetration and usage catch up with global benchmarks (35-40% of ARPU vs. 15% in India). Volume growth-led higher network utilization, likely pricing power, decline in channel commissions, and improving profitability in new circles are key margin drivers. Change in estimates: Our FY14E/15E revenue stands increased by ~4% each led by higher volume growth assumption. Revenue growth-led operating leverage (~200 bps margin expansion over FY13-15E) leads to upward revision in FY14/15 EBITDA estimates by 7%/ 5% respectively. FY14/15 PAT estimates stand higher by 11%/ 8% respectively. Raise target multiple: to 7.5x FY15E EV/EBITDA (7x earlier) to factor in better cash flow due to stable capex and improving RoE (14% in FY15E vs. 8% in FY13). Revised TP stands at Rs 124 vs. Rs 105 earlier. Our TP of Rs 124 comprises (a) business value of Rs 154/sh and (b) negative impact of regulatory charges (50% of maximum possible amount) at Rs 30/sh. Maintain HOLD given limited room for upside from CMP. Significant cash profits dilute regulatory payout concern: With an improving margin profile, Idea has been generating significant cash profits since last 3 years. Its cash profits increased to Rs 46 bn in FY13 (Rs 33 bn in FY11 and Rs 37 bn in FY12). We expect Idea to generate a cumulative Rs 121 bn cash profit over FY13-15E. After meeting capex requirement in respective years, Idea’s free cash will cushion impact of spectrum-related regulatory payouts (present value of spectrum renewal, re-farming and one-time spectrum fee liability at Rs 142 bn). At CMP of Rs 122, the stock trades at 23x FY14E EPS of Rs 5.2 (Rs 4.7 earlier) and 17x FY15E EPS of Rs 7.3 (Rs 6.8 earlier). Regards, Priya Rohira (Executive Director – IT & Telecom) Institutional Equity Research Axis Capital Ltd. Tel.: + 91 22 4325 1104 Nivedan Reddy (Asst VP – Telecom) Institutional Equity Research Axis Capital Ltd. Tel.: + 91 22 4325 1128

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