Idea Cellular (IDECEL) 75

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1 Result Update Rating matrix Rating : Hold Target : 70 Target Period : 12 months Potential Upside : -7% What s changed? Target Changed from 75 to 70 EPS FY17E Changed from 1.3 to 0.7 EPS FY18E Changed from -1.5 to -1.7 Rating Unchanged Quarterly performance Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%) Revenue 9, , , EBITDA 2, ,057.0 (7.1) 3, EBITDA (%) bps bps PAT (88.7) Key financials Crore FY15 FY16 FY17E FY18E Net Sales 31,571 35,981 37,225 38,382 EBITDA 10,812 13,030 11,423 11,598 PAT 3,193 3, (627) EPS (in ) (1.7) Valuation summary FY15 FY16 FY17E FY18E P/E NA Target P/E NA EV / EBITDA P/BV RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) 27,002.7 Total Debt (FY16) ( Crore) 41,503.5 Cash (FY16) ( Crore) EV ( Crore) 67, week H/L 194 / 72 Equity capital 3,597.8 Face value 10.0 Price performance 1M 3M 6M 12M Bharti Airtel RCOM Idea Research Analysts Bhupendra Tiwary bhupendra.tiwary@icicisecurities.com Sneha Agarwal sneha.agarwal@icicisecurities.com October 25, 2016 Idea Cellular (IDECEL) 75 Competitive pressures to hit profitability... Idea posted a 2.4% QoQ decline in the voice realisations to 32.8 paisa, which was slightly below our expectations of 33.0 paisa. The decline was, however, expected with regard to the huge competitive pressure seen in the quarter. Total minutes came in at billion vs. our expectation of billion owing to better-than-expected subscriber addition and higher volumes due to reduced tariffs in voice. Voice revenues came in at crore, down 4.2% QoQ, vs. our expectation of crore Overall data subscriber growth of 10.2% to 5.4 crore users vs. estimate of 5.2 crore users is heartening. Overall volume growth was in line with expectations at 15.4% QoQ to billion MB. However, the data realisation fall was steeper at 11.0% QoQ to 18.7 paisa, hence diluting data revenue growth to 2.5% QoQ at crore. The company has added cell sites cumulatively across the 2G, 3G and 4G network and actively marketed its 4G network. Hence, EBITDA came in at crore, vs. our estimates of crore, leading to margins of 30.5% PAT came in at 91.1 crore (vs. estimates of crore) owing to misses on the operating profit front and higher-than-expected depreciation charge Idea to focus on fresh data subscriber addition, tariffs to fall steeply In line with its laid out strategy of focusing on data subscriber addition, Idea posted 10.2% QoQ data subscriber growth to 54.1 million users coupled with 15.4% QoQ growth in overall data volume to billion MB. However, data realisation fall was steeper at 11.0% QoQ to 18.7 paisa, hence diluting data revenue growth to 2.5% QoQ at crore. Going ahead, as Idea continues to focus on new data subscriber addition and the competitive intensity being high, data tariffs are bound to decline. We expect data tariffs to decline at 29.3% CAGR in FY16-18E, diluting the data revenue growth CAGR to 18.0% to crore despite a data growth CAGR of 66.9% over FY16-18E to billion MB in FY18E. Voice realisation to face pressure as competition launches free voice Reliance Jio announced free voice to all its users on availing of its data services. This will lead to industry wide changes in overall voice realisations. In a bid to maintain market share, incumbents have to follow competition and there could be bundling of voice along with data packs. Voice volume growth is also expected to remain range bound owing to strong competition and cannibalisation towards data. We have factored in voice volume & ARPM CAGR of 3.9% & -3.6% in FY16-18E to billion minutes and 30.2 paisa, respectively. Voice revenues would, hence, remain flattish at crore in FY18E. Going gets tougher owing to stiff competition; maintain HOLD We note that Idea has successfully completed its pan-india mobile broadband footprint with purchase of MHz of spectrum at an aggregate bid value of 12,798 crore completing its mobile broadband footprint across all 22 circles with 4G capacity in 20 circles. We have revised our estimates for Idea factoring in the steep cuts in tariffs taken in response to competition. We remain wary of the disruptions in the data space with the ongoing price war. Idea, with relatively lower subscriber quality than the leaders, has higher elasticity to tariff cuts. We maintain HOLD with a revised target price of 70 on a DCF based methodology. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q2FY17 Q2FY17E Q2FY16 Q1FY17 YoY (%) QoQ (%) Comments Revenue 9, , , , Though the voice ARPM decline was higher-than-expected at 2.4% QoQ decline to 32.8 paisa, total minutes came in at billion vs. our expectations of billion leading to nearly in-line voice revenues of crore, down 4.2% QoQ. Data revenues were diluted with a steep 11.0% QoQ decline in data tariffs despite of a 10.2% and 15.4% QoQ data subscriber and volume growth, respectively Other Income Employee Expenses Marketing Expenses The company has been advertising its data offerings, which has led to higher marketing expenses Network operating expenditure 2, , , , License and WPC Charges 1, , , Roaming & Access Charges 1, , , , EBITDA 2, , , , High employee expenses and marketing costs led to lower than expected EBITDA. EBITDA Margin (%) bps -187 bps Depreciation 1, , , , Interest 1, Total Tax PAT The misses on the operating front and higher than expected depreciation has resulted in lower than expected PAT. Key Metrics Subscribers (Million) ARPU (Rs) MoU (Rs) The cut of down of freebies has limited the MOU growth in the quarter ARPM (Rs) The company has been cutting down on freebies in the voice market leading to an overall ARPM improvement Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Comments Revenue 36, , , , The data revenue growth has been slightly tweaked upwards as we build in some 4G launches in new circles in FY18E. The data revenue is expected to grow at 18.0% CAGR over FY16-18E, with realisation decline of 29.3% and volume growth of 66.9% CAGR over the same period. The other revenues have also been revised upwards in line with revenues posted in the quarter EBITDA 11, , , , EBITDA Margin (%) bps bps The high marketing expenses in order to push 4G services and network upgradation towards better 4G services would lead to slight dilution in EBITDA PAT NM EPS ( ) NM Assumptions Current Earlier Comments FY15 FY16 FY17E FY18E FY17E FY18E Wireless Subscribers (Mn) The better-than-expected subscriber growth in new circles has made us slightly revise our estimates Blended ARPU Total Minutes MoU per subscriber ARPM (Paisa) ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Idea registers 28.0% incremental subscriber market share in quarter Idea added 2.58 million subscribers in the quarter, up 2.1% QoQ to million users, forming 28.0% of the total incremental subscriber additions. We expect Idea to see subscriber growth of 4.1% CAGR in FY16-18E to million subscribers with major growth coming in from new circles. Exhibit 1: Subscriber details trends Million FY14 FY15 FY16 FY17E FY18E Subscribers Idea to follow competition in tariffs to maintain market share Voice volume decline in the quarter was lower-than-expected at 1.9% QoQ to billion minutes vs. our expectation of a 2.5% QoQ decline. The company revamped its last strategy of price increase and undertook price cuts and gave away freebies in its new circles thus aiding voice volumes. The voice tariff decline came in higher-than-expected at 2.4% QoQ to 32.8 paisa versus our estimates of a 2.0% decline. Going ahead, voice volume growth is expected to remain range bound with cannibalisation towards data. Incumbents have to undertake further price cuts and bundle voice along with data to deal with competitive pressures. We have factored in voice volume & ARPM CAGR of 3.9% & - 3.6% in FY16-18E to billion minutes and 30.2 paisa, respectively. Voice revenues would, hence, remain flattish at crore in FY18E. Exhibit 2: ARPM trends Million FY14 FY15 FY16 FY17E FY18E Subscribers ICICI Securities Ltd Retail Equity Research Page 3

4 Aims at market share gains in data via aggressive subscriber addition Idea continued to focus on data subscriber addition and posted 10.2% QoQ data subscriber growth to 54.1 million users coupled with 15.4% QoQ growth in overall data volume to billion MB. However, the data realisation fall was steeper at 11.0% QoQ to 18.7 paisa, hence diluting data revenue growth to 2.5% QoQ at crore. Going ahead, as Idea continues to focus on new data subscriber addition and the competitive intensity being high, data tariffs are bound to decline. We expect data tariffs to decline at 29.3% CAGR in FY16-18E, diluting the data revenue growth CAGR to 18.0% to crore despite data growth CAGR of 66.9% in FY16-18E to billion MB in FY18E. Exhibit 3: Data subscribers, total data traffic FY15 FY16 FY17E FY18E Data Traffic (Bn MB) Data Subscribers (Mn) - RHS Margins hit by various accounting changes, higher network costs With the shift to Ind-AS from Q1FY17 onwards, higher margin earning Indus revenues have been removed from revenues, EBITDA. The proportionate share of the company features in profit/loss from associates. This accounting change has contributed to some dilution in EBITDA. The quarter saw higher-than-expected employee and marketing expenses leading to lower-than-expected EBITDA margin of 30.5% vs. estimates of 31.7%. With the newly purchased 4G spectrum, the company will further push its 4G offerings, which will lead to an increase in marketing costs, thus impacting the margins. We expect margins of 30.7% and 30.2% in FY17E and FY18E, respectively. Exhibit 4: EBITDA and PAT margins trend (%) FY14 FY15 FY16 FY17E FY18E EBITDA Margin PAT Margin ICICI Securities Ltd Retail Equity Research Page 4

5 Other takeaways from conference call Voice tariffs: The industry had not follow suit at Idea s strategy of reducing freebies and promotional minutes. As a result, Idea would again be re-aligning their voice tariff which has peaked out. The company s key focus remains on subscriber addition and would be taking a decline especially in the challenger circles. The company would now re-align its pricing to paisa lower than leader, which will lead to reduction in voice ARPMs. As per the company, the impact of Reliance Jio on voice volumes remains very small as on date. The minutes growth of Idea has been slower due to tariff increase undertaken in the January-March period, which has led to softer subscriber acquisition in Q1FY17 The industry will move towards ARPU led approach, going ahead, with the bundling of voice with the data offerings In order to expand capacity to 12x of the current capacity it will entail an additional capex of crore over the next 2 years. Total sites required for such a capacity is (inclusive of 3G FDD, 4GFDD and TDD in three circles). The company currently has unique cell sites and would increase the cell site capacity over the course of the coming years. Once the optimum capacity is achieved, overall capex will continue to decline. The company would be keen on looking at any active infrastructure sharing opportunities that would be available to reduce costs. It is actively exploring options and looking at entering into partnerships with other telcos so as to make best possible utilisation of capital The company has met its spectrum requirement for the coming decade post its participation in the October auctions. Idea has successfully completed its pan-india mobile broadband footprint and significantly boosted its capacity spectrum portfolio. The company has procured MHz of spectrum at an aggregate bid value of 12,798.0 crore completing its mobile broadband footprint across all 22 circles with 4G capacity in 20 circles ICICI Securities Ltd Retail Equity Research Page 5

6 Key takeaways from annual report Idea Cellular, in its FY16 annual report, stated its intent on creating a massive network capacity to support the expected surge in the mobile data demand and focussed on reach, relevance and resilience by transforming itself from Pure Voice to Integrated Telecom & Internet Operator Digital Services - Idea is planning to enter into the digital services space during FY17 & FY18 across range of information, entertainment, communication and utilities applications along with monetisation programme of its key assets like location, billing, campaigning capabilities etc through API route. Idea Digital Services are slated to offer Idea branded (on its own or white labeled platform) services in partnership with multiple content providers In order to achieve the network scalability goals, the company is rigorously working to expand its Optical Fibre Cable (OFC) transmission network, Idea expanded its OFC transmission network approximately to 115,500 km in FY16 compared to 93,400 km in FY15, an increase of 22,100 km Revenue market share: Idea improved its revenue market share (RMS) by 1.4% over the last year to 18.9% (FY16), recording the highest RMS improvement by any operator. Idea remains the preferred choice with one out of three new subscribers getting registered on Idea s network. The incremental subscriber market share (on VLR) stands at 30.5% Spectrum purchases lead to negative free cash flows: The free cash flows in FY16 turned negative at crore despite crore cash from operating activities owing to the capex obligations of crore (including payment towards spectrum and licenses of crore). The company also repaid borrowings to the tune of crore. Consequently cash & cash equivalents as on FY16 decreased by crore with Idea Cellular ending the year with cash and cash equivalents of crore Depreciation & amortisation expenses increased 25.4% to crore for FY16 against crore for the previous year on account of higher amortisation of spectrum acquired in auctions for 3G services, 4G services and in the seven expiring service areas. Interest & finance charges for increased from crore to crore largely due to higher interest cost on deferred payment obligation towards spectrum ICICI Securities Ltd Retail Equity Research Page 6

7 Valuation We note that Idea has successfully completed its pan-india mobile broadband footprint with purchase of MHz of spectrum at an aggregate bid value of 12,798 crore completing its mobile broadband footprint across all 22 circles with 4G capacity in 20 circles. We have revised our estimates for Idea factoring in the steep cuts in tariffs taken in response to competition. We remain wary of the disruptions in the data space with the ongoing price war. Idea, with relatively lower subscriber quality than the leaders, has higher elasticity to tariff cuts. We maintain HOLD with a revised target price of 70 on a DCF based methodology. Exhibit 5: DCF assumptions Particulars Amount WACC 10.0% Revenue CAGR over FY16E - FY22E 6.0% PV of Cash Flow Till Terminal Year -12,042.6 Terminal Growth 3.9% Present Value of terminal cash flow 77,065.1 PV of firm 65,022.5 Less: Net Debt 39,949.8 Total present value of the Equity (excluding current cash) 25,072.7 Number of Equity Shares outstanding DCF - Target price ( ) 70 Exhibit 6: Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY15 31, FY16 35, FY17E 37, (92.0) FY18E 38, NA ICICI Securities Ltd Retail Equity Research Page 7

8 Recommendation history vs. consensus estimates ( ) (%) 70 Dec-14 Mar-15 May-15 Aug-15 Oct-15 Dec-15 Mar-16 May-16 Aug-16 Oct Price Idirect target Consensus Target Mean % Consensus with BUY Source: Bloomberg, Company, ICICIdirect.com Research Key events Nov-12 Jun-13 Spectrum auction post license cancellation takes place. These auctions reduce several players to regional operators. Idea acquires licenses in the cancelled circles Pricing power returns to operators. ARPMs start showing upward momentum. Idea increases its ARPM from 41 paisa at the end of FY13 to 44.9 paisa by Q3FY14 Feb-14 Jun-14 Jul-14 Mar-15 Dec-15 Jan-15 Spectrum auctions held in the 900 and1800 MHz band while Idea purchases spectrum in 11 circles at an outlay of crore Idea Cellular succesfully completes its QIP of 3000 crore and allots million fresh equity shares at an issue price of 134 per equity share, including 124 as a premium on per share Idea raises 750 crore by making preferential allotment to Axiata Group. Axiata was alloted 51.8 crore equity shares at per equity share Spectrum auctions held in the 800, 900, 1800 and 2100 Mhz band. Idea participates in auctions and wins back all its expiring spectrum with a total of 79.4 MHz won. The total payout for Idea is crore and the immediate payout is 7790 crore Enters into agreement with Videocon to purchase its spectrum in the circles of UP(W) and Gujarat for an outlay of 3310 crore Launches its high-speed 4G LTE network across four South India telecom service areas of Andhra Pradesh, including Telangana, Karnataka, Kerala, and Tamil Nadu. Further, Idea on 14 January, 2016 extends its 4G services to telecom circles of Madhya Pradesh and Chhattisgarh, Punjab and Haryana, and now cover 183 towns across seven circles for high-speed LTE services Oct-16 Idea has successfully completed its pan-india mobile broadband footprint and significantly boosted its capacity spectrum portfolio. The company has procured Mhz of spectrum at an aggregate bid value of 12,798.0 crore completing its mobile broadband footprint across all 22 circles with 4G capacity in 20 circles Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m)n Change (m) 1 Aditya Birla Group 30-Jun , Axiata Group Bhd 30-Jun Birla TMT Holdings Pvt. Ltd. 30-Jun Stewart Investors 30-Jun Providence Equity Partners LLC 30-Jun ICICI Prudential Life Insurance Company Ltd. 30-Jun Capital World Investors 30-Jun First State Investments (Singapore) 31-Aug Schroder Investment Management Ltd. (SIM) 30-Jun The Vanguard Group, Inc. 30-Jun Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Sep-15 Dec-15 Mar-16 Jun-16 Mar-16 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares ICICI Prudential Life Insurance Company Ltd M M Providence Equity Partners LLC M M Stewart Investors +8.45M +5.35M BNP Paribas Asset Management India Pvt. Ltd M -5.98M Franklin Templeton Asset Management (India) Pvt. Ltd M +1.55M Tata Asset Management Limited -5.94M -5.00M Capital Research Global Investors +1.46M +1.23M BNP Paribas Investment Partners Asia Ltd M -3.67M First State Investments (Singapore) +1.52M +1.09M British Columbia Investment Management Corp M -2.52M Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary Profit and loss statement Crore (Year-end March) FY15 FY16 FY17E FY18E Total operating Income Growth (%) Employee Expenses 1, , , ,984.9 Roaming & Access Charges 4, , , ,929.6 Network operating expenditure 7, , , ,845.0 License and WPC Charges 3, , , ,433.1 SG&A Expenses 2, , , ,581.1 Other Costs ,010.7 Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income Non Operating Expenses PBT MI/ Profit from associates Total Tax PAT Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY15 FY16 FY17E FY18E Profit after Tax 3, , Add: Depreciation 5, , , ,635.9 Add: Interest paid 1, , , ,451.1 (Inc)/dec in Current Assets (1,672.7) (210.0) (195.2) Inc/(dec) in CL and Provisions 1, , Others CF from operating activities 8, , , ,563.5 (Inc)/dec in Investments -11, , (Inc)/dec in Fixed Assets -4, , , ,500.0 Others , CF from investing activities -16, , , ,500.0 Issue/(Buy back) of Equity Inc/(dec) in loan funds 5, , , Dividend paid & dividend tax Interest Paid -1, , , ,451.1 Others 4, , , CF from financing activities 8, , , ,951.1 Net Cash flow 1, Opening Cash , Closing Cash 1, Balance sheet Crore (Year-end March) FY15 FY16 FY17E FY18E Liabilities Equity Capital 3, , , ,600.5 Reserve and Surplus 19, , , ,867.7 Others Total Shareholders funds 23, , , ,470.1 Total Debt 26, , , ,951.5 Deferred Tax Liability 1, , , ,071.4 Others , , ,274.0 Total Liabilities 52, , , ,767.0 Assets Gross Block 62, , , ,073.1 Less: Acc Depreciation 26, , , ,838.0 Net Block 35, , , ,235.1 Capital WIP 5, , , ,500.0 Total Fixed Assets 40, , , ,735.1 Investments 11, , , ,378.9 Inventory Debtors , , ,256.2 Loans and Advances 5, , , ,104.1 Other Current Assets Cash 1, Total Current Assets 8, , , ,541.1 Creditors 6, , , ,622.8 Provisions , , ,293.4 Total Current Liabilities 7, , , ,916.2 Net Current Assets , , ,375.1 Other Non Current Assets Application of Funds 52, , , , Key ratios (Year-end March) FY15 FY16 FY17E FY18E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios EBITDA Margin (%) EBIT Margin (%) PAT Margin (%) Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 9

10 ICICIdirect.com coverage universe (Telecom) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Bharti Airtel (BHAAIR) Hold 124, Bharti Infratel (BHAINF) Buy 71, Idea Cellular (IDECEL) Hold 27, NA NM Tata Comm. (TATCOM) Hold 18, NM NA NA ICICI Securities Ltd Retail Equity Research Page 10

11 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 11

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