BSE SENSEX S&P CNX 19,164 5,678 Bloomberg IDEA IN Equity Shares (m) 3,316.2 M.Cap. (INR b) / (USD b) 513.7/8.4 52-Week Range (INR) 176/72 1, 6, 12 Rel. Per (%) 12/45/83 Financials & Valuation (INR Billion) Y/E Mar 2013 2014E 2015E Net Sales 224.6 266.8 304.5 EBITDA 60.0 82.1 96.1 Adj. Net 10.1 19.9 29.5 Adj. EPS 3.1 6.0 8.9 Adj. EPS Gr. 39.6 96.9 47.9 BV/Sh (INR) 43.6 49.8 57.7 RoE (%) 7.4 12.9 16.6 RoCE (%) 5.7 8.2 11.3 Div. Payout 11.5 11.5 11.5 Valuations P/E (x) 50.7 25.8 17.4 P/BV (x) 3.6 3.1 2.7 EV/EBITDA 10.7 7.5 6.0 Div. Yield (%) 0.2 0.4 0.7 5 August 2013 1QFY14 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); +91 22 3982 5428 Investors are advised to refer through disclosures made at the end of the Research Report.
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 65,388 18.8 7.9 63,762 2.5 Adj EBITDA 14,355 17,491 21,013 46.4 20.1 18,749 12.1 Adj EBITDA margin (%) 26.1 28.9 32.1 605bps 328bps 29.4 273bps Depreciation and amortization 8,324 9,092 11,353 36.4 24.9 9,388 20.9 EBIT 6,031 8,399 9,660 60.2 15.0 9,361 3.2 EBIT margin (%) 11.0 13.9 14.8 381bps 92bps 14.7 9bps Net Finance Costs 2,670 2,244 2,211-17.2-1.5 2,421-8.7 Proforma Profit before Tax 3,361 6,155 7,450 121.6 21.0 6,940 7.3 Adj Tax 1,019 2,313 2,572 152.4 11.2 2,429 5.9 Tax rate (%) 30.3 37.6 34.5 421bps -306bps 35.0-48bps Proforma Profit after Tax 2,342 3,842 4,878 108.3 27.0 4,511 8.1 * 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) 117.2 121.6 125.0 6.7 2.8 125.0 0.0 ARPU (INR/month) 156 167 174 11.5 4.2 168 3.8 Total minutes 131 143 147 12.5 2.7 149-1.2 Minutes of use/sub/month 379 406 398 5.0-2.0 403-1.1 Revenue per min (paisa) 41.2 41.1 43.7 6.2 6.2 41.6 4.9 5 August 2013 2
Segmental break-up Consolidated revenue break-up (INR b) 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 Established service areas* 48.8 47.1 49.3 53.3 62.0 New service areas* 6.6 6.4 6.8 7.7 3.4 Idea standalone 55.4 53.5 56.1 61.0 65.4 Proportionate revenue - Indus 5.0 5.3 5.4 5.6 5.6 Eliminations -5.4-5.7-5.7-6.0-5.6 Consolidated revenue 55.0 53.1 55.8 60.6 65.4 Consolidated EBITDA break-up (INR b) Established service areas* 14.6 14.4 15.0 16.7 19.8 9 new service areas -1.69-1.76-1.79-1.67-1.31 Idea standalone 12.9 12.6 13.2 15.0 18.4 Proportionate EBITDA - Indus 1.5 1.6 1.6 1.7 2.3 Consolidated EBITDA 14.4 14.2 14.7 16.7 20.8 EBITDA margin (%) Established service areas* 29.9 30.5 30.4 31.4 31.9 9 new service areas -25.7-27.5-26.3-21.7-38.8 Idea standalone 23.3 23.6 23.5 24.7 28.2 Implied margin - Indus 29.3 30.1 29.0 30.1 41.4 Consolidated EBITDA margin 26.1 26.8 26.4 27.6 31.8 * 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) 0.41 0.43 0.43 0.42 0.41 0.41 0.41 0.41 0.44 160 155 159 160 156 148 158 167 174 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 5 August 2013 3
Total minutes up ~3% QoQ Proforma standalone EBITDA/min up 14% QoQ (p) 9.6 9.0 8.8 9.3 9.8 9.8 10.5 10.9 9.8 10.0 10.0 11.0 12.5 1QFY11 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 31.8 23.6 16.7 11.4 9.0 1QFY11 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 2013 4
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 85 9.5 811 245 Stake in Indus FY15 EV/Tower 118,000 3.3 40* 12 Less Net debt (FY15E) 58 18 Less 75% of potential spectrum related payments within 4 yrs 129 39 Total Value 663 200 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 263 301 339 Actual/New 267 305 343 Change (%) 1.5 1.2 1.0 EBITDA (INRb) Old 75 90 103 Actual/New 82 96 110 Change (%) 9.1 6.4 6.5 EBITDA margin (%) Old 28.6 30.0 30.4 Actual/New 30.8 31.6 32.1 Change (bp) 215bp 154bp 168bp Depreciation & amortization (INR b) Old 38.7 39.0 Actual/New 44.0 45.6 42.0 Change (%) 13.7 16.9 51.1 Net finance cost (INR b) 21.6 Old 8.2 7.2 7.1 Actual/New 7.3 6.1 5.4 Change (%) -10.7-15.2-24.1 Tax rate (%) Old 35.0 33.5 33.5 Actual/New 35.2 33.5 33.5 Change (bp) 17bp 0bp 0bp Net Profit (INR b) Old 18.4 29.3 36.0 Actual/New 19.9 29.5 35.6 Change (%) 8.4 0.6-1.1 EPS (INR) Old 5.6 8.9 10.9 Actual/New 6.0 8.9 10.7 Change (%) 8.4 0.5-1.2 5 August 2013 5
KPI Trend - Idea (Standalone) 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 YoY Gr QoQ Gr Minute of Usage (b) 108.6 106.2 114.0 124.3 130.9 125.6 132.2 143.4 147.3 12.5% 2.8% Mobile ARPU (INR) 160 155 159 160 156 148 158 167 174 11.5% 4.2% MOU (per sub) 391 364 369 379 379 359 384 406 398 5.0% -2.0% Mobile RPM (INR) 0.41 0.427 0.433 0.422 0.412 0.413 0.411 0.412 0.437 6.1% 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) 19.4 20.5 21.8 22.9 22.6 23.1 23.1 25.4 27.8 23.1% 9.7% Voice ARPU (INR) 141 135 137 137 133 125 135 142 146 9.6% 3.2% Voice RPM (INR) 0.36 0.37 0.37 0.36 0.35 0.35 0.35 0.35 0.37 4.2% 5.1% EBITDA/min (INR) 0.10 0.10 0.10 0.11 0.10 0.10 0.10 0.11 0.12 28.6% 15.4% EBITDA/sub (INR) 37 35 38 40 36 35 37 43-100.0% -100.0% 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) 64 90 113 122 137 151 164 YoY (%) 48 40 26 8 12 11 9 Average subs (m) 53 77 101 117 129 144 158 YoY (%) 70 44 32 16 10 11 10 Net adds per month ex acquisition (m) 1.7 2.1 1.9 0.7 1.2 1.2 1.1 YoY (%) 40 23-10 -62 68-2 -10 Total mobile traffic (b min) 225 363 453 532 589 653 716 YoY (%) 46 45 25 17 11 11 10 Average Rev Per User (INR/month) 207 165 158 156 167 172 176 YoY (%) -21-20 -5-1 7 2 3 Minutes of Use/Sub/Month 388 394 372 376 380 378 378 YoY (%) -5 2-6 1 1-1 0 Mobile RPM (INR) 0.53 0.42 0.42 0.42 0.44 0.45 0.47 YoY (%) -18-21 1-2 6 3 3 Mobile EBITDA/min. (INR) 0.15 0.10 0.11 0.11 0.14 0.14 0.15 YoY (%) -19-30 8 0 22 6 4 Capex (INRb) 33 88 39 35 36 30 31 Capex / Sales (%) 27 57 20 16 14 10 9 5 August 2013 6
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 26.3 37.6 15.6 FY15E 17.8 23.5 8.4 P/BV (x) FY14E 7.6 7.8 7.8 FY15E 6.1 6.3 6.2 EV/Sales (x) FY14E 2.3 2.3 2.6 FY15E 1.9 2.0 2.2 EV/EBITDA (x) FY14E 3.2 2.1 0.8 FY15E 2.7 2.0 0.7 EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY14 6.0 6.2-3.4 FY15 8.9 8.8 1.4 Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 159 200 25.8 Buy Shareholding pattern (%) June-13 Mar-12 June-12 Promoter 45.9 45.9 46.0 Stock performance (1-year) Domestic Inst 5.3 5.7 6.9 Foreign 46.7 46.3 44.8 Others 2.2 2.1 2.4 5 August 2013 7
Financials and valuation 5 August 2013 8
N O T E S 5 August 2013 9
Disclosures This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement IDEA CELLULAR LTD 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues. Regional Disclosures (outside India) This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions. For U.K. This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to which this document relates is only available to investment professionals and will be engaged in only with such persons. For U.S. Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons. This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement. The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered brokerdealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account. For Singapore Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited: Kadambari Balachandran Email : kadambari.balachandran@motilaloswal.com Contact: (+65) 68189233 / 65249115 Office address: 21 (Suite 31), 16 Collyer Quay, Singapore 049318 Motilal Oswal Securities Ltd 5 August 2013 Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025 10 Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com