Idea Cellular - Stretched valuations, no positive triggers in sight - Karvy Stock Broking

Valuations at 7.5x EV/EBITDA at a premium to Bharti, little scope for upside: Idea's stock trades at an EV/EBITDA of 7.5x FY12E EBITDA, an 8% premium to Bharti (6.9x EV/EBITDA). We believe this is not justified owing to Bharti's superior operating metrics. Bharti reported EBITDA margins of 36.1% v/s 24.3% for Idea (1QFY11), return on equity of 16.6% v/s 7.7% for Idea (FY11E) and had a net-debt equity ratio of 0.1x at the end of FY10 (0.6x for Idea). Even post-Zain and debt taken on for 3G spectrum, we expect Bharti's net debt-equity ratio to stand at 0.9x and 0.6x in FY11 and FY12, respectively as compared with 1x and 0.8x, respectively for Idea Cellular.

3G service launch unlikely to have significant impact on financials: We have factored in 3G revenues for Idea post receipt of 3G spectrum last month. We forecast 1.6 mn 3G subscribers in FY12 and ARPU of Rs 600/month, leading to 7% and 6% increases in FY12E top-line and EBITDA, respectively. Owing to higher amortisation costs of Rs 2.9 bn (20-year amortisation period for 3G spectrum costs), net profit falls by 19% v/s earlier estimates. We believe it could take 3-4 years before Idea can witness returns on its 3G investments.

MNP, another headwind: Mobile number portability (MNP) is to be launched in India on October 31, 2010, which is likely to be another headwind for the sector. MNP is likely to lead to a price war in the post-paid segment of the market and could hurt margins going forward by 100 bps.

Maintain 'Under performer': We maintain an 'Under performer' rating on Idea Cellular owing to expensive valuations with a target price of Rs 66, implying an EV/EBITDA multiple of 7x FY12E EBITDA.

Source : Equity Bulls

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