Q3FY18 RESULT UPDATE RETAIL EQUITY RESEARCH Idea Cellular Ltd Telecom BSE CODE: 532822 NSE CODE: IDEA Bloomberg CODE: IDEA:IN SENSEX: 34,446 HOLD Rating as per Largecap 12months investment period CMP Rs. 82 TARGET Rs. 86 RETURN 5% 27 th February 2018 Weak quarter; Merger to drive synergies Idea Cellular Limited ( Idea ) is the third largest wireless operator in India with a subscriber base of 188.5 million as on 31 st December 2017. During Q3FY18, consolidated revenue declined by 13% QoQ as voice and data rates plunged 24% and 26% QoQ, respectively impacted by sharp cut in IUC and ARPU downtrading leading to fall in realization. EBITDA margin continues to remain under pressure and fell by 130bps QoQ to 18.8% due to pricing pressure and IUC cut. With the merger process expected to be completed by H1CY18, we expect synergies to start accruing from FY20E at Rs2,048 crore (nil FY19E) leading to an expansion in EBITDA margin to 28.4% in FY20E for the combined entity. We recommend HOLD rating on the stock with a revised target price (TP) of Rs 86 based on SOTP methodology. Aggressive pricing impacts revenue Idea reported 13% QoQ decline in revenue in Q3FY18 due to sharp reduction in voice and data rates. Idea's blended ARPU fell sharply to Rs.114 in Q3FY18, a decline of 14% QoQ. Although, the adoption of bundled plans has led to a surge in voice volumes with voice minutes growth of 10.8% QoQ in Q3FY18, the company s voice realization rate declined by 23.6% impacted by reduction in IUC rate and aggressive pricing. Hence, Voice Average revenue per user (ARPU) declined by 15% QoQ. On the data front, the company added 4.4mn new subscribers and in the broadband business, it added 5.2mn subscribers, thus leading to 30% surge in data volume. This coupled with higher data offering led to 24.6% QoQ surge in data consumption per subscriber. However, data realization fell by 26% QoQ to 2 paise resulting in 10% decline in data ARPU. On the positive side, Idea witnessed strong new subscriber addition with 7.5 million Net customer adds during Q3FY18. Resultantly, it improved its Subscriber Market Share to 19.8% in November 2017 as against 19.4% in August 2017. Though we expect ARPU to remain under pressure in the near term due to recent price cuts (Jan-2018), cut in rate on international incoming calls and down-trading of subscribers, we expect it to recover in FY20E due to consolidation in the industry, higher adoption of bundled plans along with SIM consolidation. EBITDA margin to recover in FY20E EBITDA declined by 19% QoQ due to lower sales coupled with significant pricing pressure and IUC rate cut. Accordingly, EBITDA margins contracted by 130 bps QoQ to 18.8%. As a result, the company s net loss widened to Rs1,284.5 crore in Q3FY18. We expect EBITDA margin to remain under pressure in FY18E/FY19E as realizations will be further impacted by recent tariff cuts by Reliance Jio to capture subscriber market share. However, with the merger process expected to be completed by H1CY18, we expect synergies to start accruing from FY20E. The overall synergy is expected to be around Rs 14,000 crore annually (60% operational synergy) which will be realised in four years post-merger completion. We build in synergy benefit of Rs2,048 crore in FY20E (nil FY19E) leading to an expansion in EBITDA margin to 28.4% in FY20E for the combined entity. Other highlights The management has raised FY18 capex guidance to Rs70bn from Rs60bn and majority of it is focused toward 4G expansion and capacity. Total net debt stood at Rs 55,781.80 crore as of December 31, 2017 as against Rs50,072 crore as of March 31, 2017, an increase of 11%. To prune its debt and further augment the long-term capital resources, the company is looking at various options such as monetising its stake in Indus towers and capital infusion through equity. It has recently raised Rs 35 bn through QIP along with recent infusion of Rs. 32.5bn by Idea s Promoter /Promoter Group. This will help Idea reduce net-debt by approximately Rs. 67.5 bn. Outlook & Valuation. We believe Idea s focus on the merger and accelerating synergistic benefits both in terms of operating cost and capex will aid in achieving higher level of efficiency going ahead. The merger with Vodafone will help Idea to reduce cost and improve infrastructure which will in-turn aid in strengthening its customer base. Further, we expect Idea to see a pickup in subscriber addition on the back of its enhanced presence in rural hinterland and exit of smaller players in the sector. Importantly, the company s fund-raising will provide Idea with much-needed liquidity to boost network and protect its revenue and market share. Moreover, Idea s plan to monetise its tower assets will strengthen its balance sheet. Also, the company s target to roll out VoLTE services by calendar year 2018 and some positive signs in the form of higher subscriber addition & reduction in churn rate augurs well. However, relatively lower capex and company s strategy to stay away from price cuts may lead to loss of market share. Hence, we recommend HOLD rating on the stock with a target price of Rs86 based on STOP methodology. Company Data Market Cap (Rs. cr) 32,339 Enterprise Value (Rs. cr) 83,195 Outstanding Shares (cr) 393 Free Float 58% Dividend Yield 0.7% 52 week high Rs. 124 52 week low Rs. 71 6m average volume (cr) 1.6 Beta 1.1 Face value Rs. 10 Shareholding % Q1FY18 Q2FY18 Q3FY18 Promoters 42.4 42.4 42.4 FII s 25.9 26.5 27.2 MFs/Insti 8.8 8.6 8.1 Public 2.3 2.1 1.9 Others 20.6 20.4 20.4 Total 100.0 100.0 100.0 Price Performance 3mth 6mth 1 Year Absolute Return (13%) (9%) (28%) Absolute Sensex 2% 9% 19% Relative Return* (15%) (18%) (47%) *over or under performance to benchmark index Consolidated (Rs.cr) FY18E FY19E FY20E Sales 28,338 28,865 31,997 Growth (%) -20.3% 1.9% 10.8% EBITDA 5,628 5,990 8,141 EBITDA Margin (%) 19.9 20.8 25.4 PAT Adj (4,630) (4,611) (3,557) Growth (%) 1149% -0.4% -22.9% Adj.EPS (11.8) (11.7) (9.0) Growth (%) 1045% -0.4% -22.9% P/E - - - P/B 1.4 1.7 2.1 EV/EBITDA 15.0 14.5 10.6 RoE (%) (19.3) (21.9) (21.0) Adj. D/E 2.4 2.9 3.6
Quarterly Financials (Consolidated) Profit & Loss Account (Rs cr) Q3FY18 Q3FY17 Q2FY18 QoQ 9MFY18 9MFY17 Revenue 6,510 8,663 (24.9) 7,466 (12.8) 22,142 27,450 (19.3) EBITDA 1,223 2,165 (43.5) 1,502 (18.5) 4,600 8,098 (43.2) EBITDA Margin (%) 18.8 25.0 (620bps) 20.1 (132bps) 20.8 29.5 (872bps) Depreciation 2,142 1,965 9.0 2,114 1.3 6,324 5,839 8.3 EBIT (918) 200 (558.6) (613) 49.8 (1,723) 2,259 (176.3) Interest 1,191 967 23.2 1,228 (3.0) 3,588 2,977 20.5 Other Income 42 44 (3.8) 45 (7.5) 103 239 (57.0) Exceptional Items - - - - - - - - PBT (2,067) (723) 185.9 (1,796) 15.1 (5,209) (480) 985.6 Tax (701) (225) 211.7 (605) 15.9 (1,755) (84) 1,981.6 PAT (1,366) (498) 174.2 (1,191) 14.7 (3,454) (396) 773.3 Minority Interest 82 114 (28.5) 84 (3.0) 248 324 (23.4) Reported PAT (1,285) (384) 234.6 (1,107) 16.1 (3,206) (72) 4,354.3 Adjustment - - - - - - - - Adj PAT (1,285) (384) 234.6 (1,107) 16.1 (3,206) (72) 4,354.3 No. of shares (cr) 360.8 360.2 0.2 360.8-360.8 360.2 0.2 EPS (Rs) (3.6) (1.1) 234.1 (3.1) 16.1 (8.9) (0.2) 4,347.2 Segment Revenue (Rs cr) Q3FY18 Q3FY17 Segments Q2FY18 QoQ 9MFY18 9MFY17 Mobility 6,311 8,472 (25.5) 7,265 (13.1) 215,485 269,233 (20.0) International Long Distance 158 180 (11.8) 157 0.8 4,754 5,921 (19.7) Passive Infrastructure 298 251 18.5 314 (5.2) 8,940 4,982 79.4 Less: Inter Segmental Eliminations 257 240 7.3 270 (4.6) 7,763 (5,640) - Total income from operations 6,510 8,663 (24.9) 7,466 (12.8) 221,416 274,496 (19.3) Source: Company, Geojit Research Pro forma Financial statement for merged entity (Idea and Vodafone) Combined Entity (Rs. Crore) FY16 FY17 FY18E FY19E FY20E Revenue 81298 78658 63234 62715 68893 EBITDA 25327 22024 12023 12929 17550 EBITDA Margin 31.2% 28.0% 19.0% 20.6% 25.5% Synergy 0 2048 EBITDA (Post synergy) 12929 19597 EBITDA margin 28.4% Valuation Basis Multiple Value (Rs cr) Value/share (Rs) Idea and Vodafone Wireless (Combined) Mar-20 166577 8.5 EV/EBITDA Net Debt 98280 Value 68297 O/s shares (Cr) 790 Value per share 86.5
Consolidated Financials (excluding Vodafone Ltd) Profit & Loss Account Sales 35,949 35,576 28,338 28,865 31,997 % change 13.9% -1.0% -20.3% 1.9% 10.8% EBITDA 11,968 10,276 5,628 5,990 8,141 % change 10.7% -14.1% -45.2% 6.4% 35.9% Depreciation 6,256 7,827 8,486 8,920 9,522 EBIT 5,711 2,449 (2,857) (2,930) (1,381) Interest 1,779 4,012 4,801 4,757 4,757 Other Income 213 307 152 180 200 PBT 4,146 (1,256) (7,506) (7,507) (5,937) % change -15.9% - 497.6% 0.0% -20.9% Tax 1,522 (464) (2,544) (2,545) (2,013) Tax Rate (%) 36.7% 36.9% 33.9% 33.9% 33.9% Reported PAT 2,728 (400) (4,630) (4,611) (3,557) Adj* (317) (29) 0 0 0 Adj PAT 3,046 (371) (4,630) (4,611) (3,557) % change -4.6% - 1149.2% -0.4% -22.9% No. of shares (cr) 360.1 360.5 393.4 393.4 393.4 Adj EPS (Rs) 8.5 (1.0) (11.8) (11.7) (9.0) % change -4.7% - 1044.8% -0.4% -22.9% DPS (Rs) 0.6 0.6 - - - Cash flow Pre-tax profit 4,250 (863) (7,175) (7,156) (5,569) Depreciation 6,256 7,827 8,486 8,920 9,522 Changes in W.C (92) 526 467 396 369 Others 1,395 3,728 4,648 4,576 4,557 Tax paid (861) (681) 2,544 2,545 2,013 C.F.O 10,949 10,537 8,970 9,281 10,891 Capital exp. (12,932) (12,670) (7,000) (7,000) (6,000) Change in inv. 10,391 (3,347) 2,200 - - Other invest.cf 153 462 152 180 200 C.F - investing (2,389) (15,556) (4,648) (6,820) (5,800) Issue of equity 18 10 3,252 - - Issue/repay debt (8,648) 8,430 - - - Dividends paid (260) (260) - - - Other finance.cf (439) (3,735) (4,801) (4,757) (4,757) C.F - Financing (9,330) 4,444 (1,549) (4,757) (4,757) Chg. in cash (770) (574) 2,774 (2,295) 334 Closing cash 769 83 2,857 562 896 Balance Sheet Cash 769 83 2,857 562 896 Accounts Receivable 1,142 1,314 1,047 1,066 1,182 Inventories 107 59 58 58 58 Other Cur. Assets 1,133 1,276 1,077 1,115 1,233 Investments 3,471 6,378 4,178 4,178 4,178 Gross Fixed Assets 71,353 90,684 1,00,219 1,07,219 1,14,219 Net Fixed Assets 65,184 76,757 77,807 75,887 73,365 CWIP 6,040 7,535 5,000 5,000 4,000 Intangible Assets 6 6 6 6 6 Def. Tax (Net) (1,954) (1,322) (1,322) (1,322) (1,322) Other Assets 2,274 3,260 3,260 3,260 3,260 Total Assets 78,172 95,346 93,967 89,810 86,857 Current Liabilities 10,951 13,645 13,644 14,098 14,702 Provisions - - - - - Debt Funds 40,541 55,055 55,055 55,055 55,055 Other Liabilities 3,128 1,914 1,914 1,914 1,914 Equity Capital 3,601 3,605 3,934 3,934 3,934 Reserves and 19,950 21,127 19,420 14,808 11,252 Surplus Shareholder s Fund 23,550 24,732 23,354 18,743 15,186 Minority Interest - - - - - Total Liabilities 78,172 95,346 93,967 89,810 86,857 BVPS (Rs) 65.4 68.6 59.4 47.6 38.6 Ratios Y.E March FY16 FY17 FY18E FY19E FY20E Profitab. & Return EBITDA margin (%) 33.3 28.9 19.9 20.8 25.4 EBIT margin (%) 15.9 6.9 (10.1) (10.2) (4.3) Net profit mgn.(%) 8.5 (1.0) (16.3) (16.0) (11.1) ROE (%) 13.1 (1.5) (19.3) (21.9) (21.0) ROCE (%) 10.4 3.8 (3.4) (3.6) (1.6) W.C & Liquidity Receivables (days) 11.6 13.5 13.5 13.5 13.5 Inventory (days) 1.7 0.9 1.0 1.0 0.9 Payables (days) 49.4 58.8 58.8 58.8 58.8 Current ratio (x) 0.3 0.2 0.4 0.2 0.2 Quick ratio (x) 0.3 0.2 0.4 0.2 0.2 Turnover &Levg. Gross asset T.O (x) 0.5 0.4 0.3 0.3 0.3 Total asset T.O (x) 0.5 0.4 0.3 0.3 0.4 Adj. debt/equity (x) 1.7 2.2 2.4 2.9 3.6 Valuation ratios EV/Net Sales (x) 1.9 2.4 3.0 3.0 2.7 EV/EBITDA (x) 5.8 8.2 15.0 14.5 10.6 P/E (x) 9.7 (79.9) (7.0) (7.0) (9.1) P/BV (x) 1.3 1.2 1.4 1.7 2.1
Recommendation Summary (last 3 years) Dates Rating Target 27-Mar-14 BUY 163 30-Apr-14 BUY 175 23-Jul-14 BUY 185 12-Dec-14 BUY 200 27-Mar-15 BUY 220 29-Apr-15 BUY 230 27-Sep-15 BUY 210 27-Jan-16 BUY 155 16-Mar-17 HOLD 115 27-Feb-18 HOLD 86 Source: Bloomberg, Geojit Research Investment Rating Criteria Large Cap Stocks; Buy - Upside is above 10%. Hold - Upside is between 0% - 10%. Reduce - Downside is more than 0%. Neutral - Not Applicable Mid Cap and Small Cap; Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%. Hold - Upside is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral - The analyst has no investment opinion on the stock under review. Geojit Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are available hereunder. However, Geojit's research desk has reviewed this report for any untrue statement of material fact or any false or misleading information. General Disclosures and Disclaimers CERTIFICATION I, Abhishek Kumar Das, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities. Disclaimer This report has been prepared by Dion and the report & its contents are the exclusive property of the Dion and the client cannot tamper with the report or its contents in any manner and the said report, shall in no case, be further distributed to any third party for commercial use, with or without consideration. Geojit Financial Services Limited has outsourced the assignment of preparation of this report to Dion. Recipient shall not further distribute the report to a third party for a commercial consideration as this report is being furnished to the recipient solely for the purpose of information. Dion has taken steps to ensure that facts in this report are based on reliable information but cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this report. It is hereby confirmed that wherever Dion has employed a rating system in this report, the rating system has been clearly defined including the time horizon and benchmarks on which the rating is based. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this report is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. Dion has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. This report is not to be relied upon in substitution for the exercise of independent judgment. Opinions or estimates expressed are current opinions as of the original publication date appearing on this report and the information, including the opinions and estimates contained herein, are subject to change without notice. Dion is under no duty to update this report from time to time. Dion or its associates including employees engaged in preparation of this report and its directors do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of securities, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc.
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