Idea Cellular. CMP: INR159 TP: INR200 Buy

Transcription

1 BSE SENSEX S&P CNX 19,164 5,678 Bloomberg IDEA IN Equity Shares (m) 3,316.2 M.Cap. (INR b) / (USD b) 513.7/ Week Range (INR) 176/72 1, 6, 12 Rel. Per (%) 12/45/83 Financials & Valuation (INR Billion) Y/E Mar E 2015E Net Sales EBITDA Adj. Net Adj. EPS Adj. EPS Gr BV/Sh (INR) RoE (%) RoCE (%) Div. Payout Valuations P/E (x) P/BV (x) EV/EBITDA Div. Yield (%) August QFY14 Results Update Sector: Telecom Idea Cellular CMP: INR159 TP: INR200 Buy Second consecutive quarter of stellar performance: Idea s 1QFY14 proforma EBITDA grew 46% YoY and 20% QoQ to INR 21b (vs est INR18.75b) led by 1) ~6% RPM increase to 43.7p, 2) ~3% traffic growth, and 3) 330bp margin expansion. Reported EBITDA included INR250m one-off license & WPC charge provision. Reported PAT impacted by change in depreciation policy: Reported PAT grew 98% YoY and 21% QoQ to INR4.63b. PAT was impacted by change in depreciation policy for certain fixed assets from 13 years to 10 years which impacted depreciation by INR1.8b. Excluding this impact, 1QFY14 proforma PAT would have been ~INR6b; up 157% YoY and 57% QoQ. Consolidated revenue grew 7.9% QoQ to INR65.4b. Proforma EBITDA margin stood at 32.1%, up 330bp. Consolidated net debt declined by ~INR13b QoQ to INR116b. Despite lower capex in 1QFY14 (INR3.3b), FY14 guidance remains unchanged at INR35b. Board approval for QIP Any aggressive bidding scenario for spectrum/m&a would constitute a key risk: Board approved share issue for an amount up to INR30b through QIP and up to INR7.5b by way of preferential issue to Axiata Group. Management explained that it is an enabling resolution and there is no capital requirement for existing operations. However idea wants to be wellprepared with respect to capital structure options if there is requirement to fund spectrum acquisition/renewal/inorganic growth. Any aggressive bidding scenario for spectrum/m&a would constitute key risk to our positive stance on the stock. Further near-term RPM improvement challenging: While declining competition has driven strong business momentum during 1HCY12, further near-term RPM improvement would be challenging given sharp 4-6% RPM hike already witnessed in 1QFY14 and seasonal dip in volumes during 2QFY14. Upgrading EBITDA estimates by 6-9%; TP by 14% to INR200: We upgrade EBITDA by 6-9% implying EBITDA CAGR of 27% over FY13-15E. The stock trades at EV/EBITDA of 7.6x FY14E and 6.1x FY15E. Maintain Buy with a revised price target of INR200 (INR 175 earlier) based on 9.5x EV/EBITDA for core business, INR3.3m/tower for Indus stake & INR129 liability towards spectrum renewal. Shobhit Khare (Shobhit.Khare@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report.

2 Strong RPM improvement; proforma EBITDA 12% above estimate Consolidated revenue grew 7.9% QoQ to INR65.4b (v/s est of INR63.8b). New circles reported combined revenue of INR3.4b EBITDA loss of INR1.31b. Mumbai and Bihar now form part of established circles. Depreciation and amortization increased 25% QoQ to INR11.35b due to downward revision of useful life of certain fixed-assets from 13 to 10 years. Due to the change in depreciation policy, Depreciation for the quarter was higher by INR1.8b and is expected to be higher by ~INR4.5b for FY14. Net finance cost of INR2.2b was 9% below our estimate. Forex loss for the quarter was INR230m (in-line) vs NIL in 4QFY13. Effective tax rate was ~35% on a proforma basis, in-line with estimates. Idea Cellular 1QFY14: Consolidated P&L and revenue drivers Consolidated P&L (INR m) 1QFY13 4QFY13* 1QFY14* YoY% QoQ% 1QFY14E v/s est (%) Revenue 55,037 60,614 65, , Adj EBITDA 14,355 17,491 21, , Adj EBITDA margin (%) bps 328bps bps Depreciation and amortization 8,324 9,092 11, , EBIT 6,031 8,399 9, , EBIT margin (%) bps 92bps bps Net Finance Costs 2,670 2,244 2, , Proforma Profit before Tax 3,361 6,155 7, , Adj Tax 1,019 2,313 2, , Tax rate (%) bps -306bps bps Proforma Profit after Tax 2,342 3,842 4, , * Adjusted for one-off provision for licence and WPC charges of INR0.76b in 4QFY13 and INR0.25b in 1QFY14 Revenue drivers 1QFY13 4QFY13* 1QFY14* YoY% QoQ% 1QFY13E v/s est (%) Subscribers (m) ARPU (INR/month) Total minutes Minutes of use/sub/month Revenue per min (paisa) August

3 Segmental break-up Consolidated revenue break-up (INR b) 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 Established service areas* New service areas* Idea standalone Proportionate revenue - Indus Eliminations Consolidated revenue Consolidated EBITDA break-up (INR b) Established service areas* new service areas Idea standalone Proportionate EBITDA - Indus Consolidated EBITDA EBITDA margin (%) Established service areas* new service areas Idea standalone Implied margin - Indus Consolidated EBITDA margin * Mumbai and Bihar included in established service areas from 1QFY14 Significant improvement across KPIs Idea reported 1QFY14 ARPU of INR174 (est of INR168), up ~4% QoQ. RPM increased ~6% QoQ to 43.7p. Non-voice revenue contribution improved 80bp QoQ to 16%. Total volumes carried on the network grew 12.5% YoY and 2.7% QoQ to 147b minutes (v/s est of 149b minutes). Minutes of use per subscriber declined 2% QoQ to 398. Monthly churn increased to 5.1% vs 4.3% in 4QFY13 but remains well below ~10% churn rate witnessed in 1HFY13. RPM up 6% QoQ Mobile ARPU (INR) Mobile RPM (INR) QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 5 August

4 Total minutes up ~3% QoQ Proforma standalone EBITDA/min up 14% QoQ (p) QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 Margin improvement led by access and Sales/marketing costs Network operations costs Roaming and access charges Subscriber acq, servicing, advert, prom EBITDA QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 Indus revenue flat QoQ; site addition continues Idea s share of 16% of Indus revenues for the quarter was INR5.6b while revenue elimination was also INR5.6b. EBITDA contribution from Indus grew 37% QoQ to INR2.3b. During 1QFY14, Idea rolled out ~2,100 2G cell sites and ~340 3G cell-sites. Idea s 3G cell site base has increased to ~17,500 (19% of 2G site base). Consolidated net debt down ~10% QoQ to INR116b Idea incurred capex of INR3.3b in 1QFY13. FY14 capex guidance remains unchanged at INR35b. Consolidated net debt declined ~10% QoQ to INR116b. 5 August

5 Idea continues to have one of the strongest balance sheets in the sector with net debt /annualized EBITDA of 1.4x and net debt/equity of 0.76x at the consolidated level. SOTP Valuation (INR) SOTP Valuation (INR) Methodology Driver Multiple Fair Value (INR b) Value/sh (INR) Core Business (ex-indus) FY15 EV/EBITDA Stake in Indus FY15 EV/Tower 118, * 12 Less Net debt (FY15E) Less 75% of potential spectrum related payments within 4 yrs Total Value Shares o/s (m) 3,303 CMP (INR) 155 Upside (%) 29 * 80% stake in ABTL which owns 16% stake in Indus towers Summary of Estimate change FY14E FY15E FY16E Revenue (INRb) Old Actual/New Change (%) EBITDA (INRb) Old Actual/New Change (%) EBITDA margin (%) Old Actual/New Change (bp) 215bp 154bp 168bp Depreciation & amortization (INR b) Old Actual/New Change (%) Net finance cost (INR b) 21.6 Old Actual/New Change (%) Tax rate (%) Old Actual/New Change (bp) 17bp 0bp 0bp Net Profit (INR b) Old Actual/New Change (%) EPS (INR) Old Actual/New Change (%) August

6 KPI Trend - Idea (Standalone) 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 YoY Gr QoQ Gr Minute of Usage (b) % 2.8% Mobile ARPU (INR) % 4.2% MOU (per sub) % -2.0% Mobile RPM (INR) % 6.1% VAS (% of ARPU) 12.1% 13.2% 13.7% 14.3% 14.5% 15.6% 14.6% 15.2% 16.0% 150bps 80bps VAS ARPU (INR) % 9.7% Voice ARPU (INR) % 3.2% Voice RPM (INR) % 5.1% EBITDA/min (INR) % 15.4% EBITDA/sub (INR) % % Prepaid (% of subs) 96.5% 96.5% 96.6% 96.5% 96.5% 96.2% 96.1% 96.1% 96.0% -50bps -10bps Monthly Churn - Prepaid 9.8% 10.1% 10.7% 10.1% 10.1% 10.4% 7.0% 4.4% 5.1% -500bps 70bps Monthly Churn - Postpaid 3.0% 3.0% 2.9% 2.8% 3.1% 3.0% 3.2% 2.9% 3.6% 50bps 70bps Monthly Churn - Blended 9.8% 9.9% 10.4% 9.9% 9.9% 10.1% 6.9% 4.3% 5.1% -480bps 80bps QoQ Growth Minute of Usage * 6.5% -2.2% 7.3% 9.0% 5.3% -4.0% 5.2% 8.5% 2.8% Mobile ARPU -0.6% -3.1% 2.6% 0.6% -2.5% -5.1% 6.8% 5.7% 4.2% MOU -1.5% -6.9% 1.4% 2.7% 0.0% -5.3% 7.0% 5.7% -2.0% Mobile RPM 1.0% 4.1% 1.4% -2.5% -2.4% 0.2% -0.5% 0.2% 6.1% Key assumptions and others data Y/E MARCH FY10 FY11 FY12 FY13 FY14E FY15E FY16E Subs (m) YoY (%) Average subs (m) YoY (%) Net adds per month ex acquisition (m) YoY (%) Total mobile traffic (b min) YoY (%) Average Rev Per User (INR/month) YoY (%) Minutes of Use/Sub/Month YoY (%) Mobile RPM (INR) YoY (%) Mobile EBITDA/min. (INR) YoY (%) Capex (INRb) Capex / Sales (%) August

7 Idea Cellular: an investment profile Company description Idea Cellular, an Aditya Birla Group company, is India s third largest wireless operator with a revenue market share of ~16%. Idea operates in all the 22 telecom circles of which 15 are classified as established service areas and 7 as new service areas. Key investment arguments Idea s strong execution in established as well as new circles will drive wireless traffic CAGR of 11% over FY13-15E. We expect consolidated EBITDA CAGR of 27% over FY13-15E largely driven by traffic growth, higher data revenue contribution and operating leverage. Strong incumbency advantage in 8 established circles and spectrum allocation in the 900MHz band in 9 circles. The company has 3G Spectrum in 11 circles. We expect incremental 3G revenue to contribute 3.7% of wireless revenues by FY15E. Investment risks The regulatory environment remains uncertain with the government decisions likely to impose significant burden on the incumbents towards licence renewal/re-farming Ongoing uncertainty pertaining to 3G roaming arrangements Entry of a well-funded operator like Reliance Industries into the Indian telecom market Recent developments Idea Board approved share issue for an amount up to INR30b through QIP and up to INR7.5b by way of preferential issue to Axiata Group. Valuation and view We upgrade EBITDA by 6-9% implying EBITDA CAGR of 27% over FY13-15E. The stock trades at EV/EBITDA of 7.6x FY14E and 6.1x FY15E. Maintain Buy with a revised price target of INR200 (INR 175 earlier) based on 9.5x EV/EBITDA for core business, INR3.3m/tower for Indus stake & INR129 liability towards spectrum renewal. Comparative valuations Idea Bharti RCOM P/E (x) FY14E FY15E P/BV (x) FY14E FY15E EV/Sales (x) FY14E FY15E EV/EBITDA (x) FY14E FY15E EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) Buy Shareholding pattern (%) June-13 Mar-12 June-12 Promoter Stock performance (1-year) Domestic Inst Foreign Others August

8 Financials and valuation 5 August

9 N O T E S 5 August

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