Idea Cellular - Higher revenue, weaker earnings, rising debt; downgrade to Reduce - BRICS

Idea Cellular reported higher than expected revenue, up 5% qoq to Rs55.8bn, driven by volume growth of 5.2% qoq, though EBITDA was largely in-line, as higher network costs and access charges led to decline of 40bps qoq in margins to 26.4%. PAT, down 4.8% qoq, was below our estimate, mainly due to higher than estimated interest charges. We marginally raise our FY14/15 EPS estimates (up 1% each), to factor in tariff hikes and rising network & subscriber acquisition costs. Raise TP to Rs105, but downgrade stock to Reduce, as upside from tariff hikes is already priced in.

Strong volume growth despite decline in subscribers: Idea reported a volume growth of 5.2% (to 132bn minutes), despite losing 1.6mn subscribers in a seasonally strong quarter. Higher network costs, employee additions, and access charges led to decline of 40bps qoq in EBITDA margin to 26.4%. Average realized rate (ARR) fell to 41.1paisa/min from 41.3paisa/min Q2, as non-voice revenue was impacted by new TRAI norms on VAS provisioning.

Traction in data revenue remains strong: Data volume and data subscribers grew15% each to 9,575TB and 21.8mn. Contribution of data revenue increased to 5.7% from 5.4% in Q2, though contribution of overall non-voice revenue fell to 14.6% from 15.6%, due to new stringent TRAI regulations on VAS.

Tariff hikes to partially impact volume growth: Management has indicated that competitive intensity is reducing, with rising costs of subscriber acquisition and shrinking operations of newer telcos. Also, lowering of validity periods, free minutes on discount vouchers, and discount on starter packs is leading to higher tariffs. We believe the tariff hikes will be revenue accretive, but will hamper traffic growth.

Valuation: Stock trades at EV/EBITDA of 7.3x FY14 and 6.4x FY15. We raise our target EV/EBITDA multiple to 7x (closer to last 5-year average of 7.3x) from 6x earlier, in view of improving pricing power and emerging clarity on the regulatory front, and raise TP to Rs105. However, we downgrade Idea to Reduce, as its debts continue to rise and upside from tariff hikes is already priced into current stock price.

Source : Equity Bulls

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