Sell IDEA Cellular - Elara Capital

• Idea Cellular
• Rating : Sell
• Target Price : INR55
• Downside : 16%
• CMP : INR65 (as on 22 July 2010)

A mixed performance

Mixed performance: PAT in-line, EBITDA margin declines

During the Q1FY11, Idea Cellular reported a top-line growth of 11.8% QoQ (~5.4% including Spice), primarily driven by a13% growth in Minutes on Network. On the bottom line, the company reported an EPS of INR0.61 (decline of 32% YoY) which was slightly better than our expectation of INR0.58 as the company capitalized interest expenses for the 3G debt.

Key parameters continue downward journey

On a consolidated basis, the EBITDA margin showed a rapid decline of 330bps sequentially due to - 1) a sharp increase (24% sequentially) in network operating expenses, 2) on consolidation of Spice numbers, and 3) on provisioning for higher spectrum charges. The noteworthy element of this decline is the 4.8% dip in the EBITDA margin in company's established circles, highlighting the fact Idea is struggling to maintain its operating margins.

ARPM declined sequentially by 6% to INR0.44 per minute, underlining the fact that the market remains very competitive on the tariff front. The management believes that the rate of decline in ARPM would slow down and that the tariff war could move to ISD rates.

Maintain Sell, revising target price upwardly to INR55

We believe that the company stretched itself to report an in-line market expectation EPS (which in-turn was reduced from INR0.68 to INR0.61 in last 10 working days). Key parameters are not showing any sign of a turn-around in the short-term while the net debt/EBITDA is already at an uncomfortably high level of 3.0x. Moreover, the company has budgeted for a high capex of INR 40-44bn for its 2G and 3G roll-outs to maintain and expand its market share. Thus we consider the current market price to have fully captured the fundamental value (excluding any M&A premium). Lastly we get further confidence in our Sell recommendation by listening to the dovish commentary of the management.

Source : Equity Bulls

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