Idea Cellular Ltd. - A strong quarter; regulatory overhang persists.. - KR Choksey

Idea Cellular reported numbers were inline with estimates. The company reported net sales of Rs 5370crs, strong growth of 27% Y-o-Y. This growth was driven by both increase in subscriber base as well as higher ARPU. EBITDA for the quarter was Rs 1357crs, a growth of 26% over Q4FY11.EBITDA margins slightly dipped by 10bps to 25.3% on account of higher networking cost and spectrum charges. Net profit was Rs 239crs which declined by 13% y-o-y due to higher amortization cost and sharp increase in interest expenses. Net profit margin for the quarter was 4.5% down by 200bps y-o-y. Steady growth in GSM subscriber addition and increase in ARPU backed by pick up in 3G services gives strong revenue visibility for FY13E. Cost rationalization and lower interest outgo will help to improve margins going forward.

Better than industry net subscriber addition led the revenue growth:

Idea's subscriber base increased from 106.4mn in Q3FY12 to 112.7mn in Q4FY12. In spite of weak quarter compared to last quarter, the company reported slight growth in ARPU. ARPU for the quarter was Rs 160. MoUs also increased by 2% Q-o-Q to 379mins. However the average realized rate declined from Rs. 433 to Rs. 422. The company reported higher mobile value added services contribution from 13.7% in Q3FY12 to 14.3% in Q4FY12. Pick up on 3G services front is clearly visible. We believe going forward data revenue will go up with increase in penetration of 3G users.

Increase in networking cost & licence fees dented operating profit:

The company reported increase in networking cost 9% Q-o-Q to Rs 1258crs and licence fees increased by whopping 31% Q-o-Q to Rs 737crs. It dragged EBITDA margins from 140bps to 25.3% from 26.7% in Q3FY12.

Regulatory overhang persists:

With recent TRAI's proposal of increasing spectrum pricing has dented market capitalization of the company. The management said the association of telecom operators has opposed the proposals and suggestions have been sent to higher authority. The company is confident that such proposals would be taken into consideration before actual implementation. We believe such regulatory changes are overhang for the company's performance.

Our View:

Idea's another strong performance shows growth is back on track with increasing trend in ARPU and higher MVAS revenue contribution. The company has been adding higher net GSM subscribers than the industry average which is contributing to strong sales in FY13E. Increase in ARPUs driven by higher realized rate, improvement in traffic and 3G being operational, Idea is on track of growth. The stock is trading at 5.8x EV/EBITDA to its FY13E earnings. We recommend BUY on the stock with a target price of Rs 95 by assigning 6.5x EV/EBITDA to its FY13E earnings.

Source : Equity Bulls

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