Idea Cellular - Unyielding focus on volume impacts pricing - Edelweiss

Idea Cellular (IDEA) reported a disappointing performance for Q1FY13. The revenue growth at 2.5% QoQ was lower than estimates since voice RPM declined by 2.7% QoQ. While MOU remained flat QoQ at 379 minutes, the decline in RPM and ARPU seems to suggest that Idea is chasing poor quality customers. The RPM decline also led to a drop in EBITDA margin of 180bps QoQ, indicating lower operating leverage. The slowdown in subscriber addition in June 2012 seems to suggest that it is no longer focusing on only market share. We are revising our FY13 EBITDA by 6% and earnings by 19%. At 6.2x FY13 EV/EBITDA, we maintain 'BUY', but prefer Bharti as the regulatory impact has not been discounted fully yet in Idea.

Focus on volume finally takes a toll on margins

Idea reported a disappointing performance for Q1FY13 by diluting its voice RPM by 2.7% QoQ for no increase in MOU. Its revenue at INR55bn, up 2.5% QoQ, is the lowest in several quarters (excluding the seasonally weak Q2). It reported a volume growth of 5.3% QoQ - the lowest in the past seven quarters, implying that it is not getting a commensurate volume growth even after sacrificing yields. The EBITDA margin declined 180bps QoQ due to the dilution in RPM, implying reduced operating leverage.

Idea entwined in problems of its own making

Idea has been overly aggressive in the market in its quest to be the fastest growing company in the sector, in our view. It had to pay a price in the form of margin dilution due to this strategy. In the month of June 2012, it added only 1.2mn subscribers compared to 1.75mn in May 2012. It seems that Idea has realised that it is better to focus on customers with higher spends and thus ensuring EBITDA growth.

Outlook and valuations: Execution falters; maintain 'BUY'

Idea impressed the Street so far with its superior execution as it reported a strong volume growth and holding margins. In Q1FY13, it seems that Idea's operating leverage has finally dwindled, diluting the margin. Going forward, we believe that Idea would focus on improving RPM, the only way for meaningful margins. At 6.2x FY13 EV/EBITDA, the stock is yet to fully discount the risk of regulatory costs. We maintain 'BUY', as EBITDA growth will still be strong at 16% in FY13, but prefer Bharti as the regulatory impact is fully discounted.

Source : Equity Bulls

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