Hold Idea Cellular
Published on Monday, November 9th, 2009 at 12:01 PMAuthor: insightt95in (170 Articles)
Idea Cellular
HOLD
Price: Rs50.60 Target Price (Sept 2010): Rs51
Walking a tightrope as tariff cuts take toll
* Maintain HOLD, TP lowered to Rs51: We expect IDEA’s FY10E-12E
growth profile to remain robust (EBITDA/EPS CAGR at 22%/13%), albeit
from a sharply lower base as impact of 50p/min and per-second billing on
revenues/margins, together with only marginal contribution to the bottom
line from Indus Towers manifest in 2HFY10E results; our FY10E normalized
net profit forecast for IDEA (Rs7 bn i.e. EPS of Rs2.2) is 19% below
consensus. In our view, peaking pressure on ARPMs and risk of
overstretched financials following 3G-related debt funding are likely to
hinder price performance over the next six months.
* IDEA’s latest prepaid offerings to yield ARPM of Rs0.44-Rs0.46: As
most operators, including IDEA, now offer similar priced unbundled per
second billing option to subs, propensity to switch operators and/or usage
of multiple SIMs for price arbitrage appears significantly reduced until
another bout of sharp tariff cuts manifest. By our calculations, IDEA’s
50p/min and 1p/sec prepaid offerings are likely to yield a blended ARPM of
44p-46p (prepaid/postpaid blended ARPM was 56p in 2QFY10).
* What’s changed: Capturing IDEA’s 2QFY10 financials, lower capex
guidance, stiffer decline in ARPUs, and slower ramp-up in profitability of
Indus Towers, we cut our FY10E/11E/12E consolidated EPS forecast for
IDEA by 18%/29%/23% respectively; implied 2HFY10E net profit is Rs2.2
bn (55% lower than normalized in 1HFY10 net profit).
* Valuations: Our 12-mth TP for IDEA (Rs51/sh vs. Rs61/sh previously) is
the sum of the DCF-based value of its wireless business (Rs36/sh) and fair
value of its 16% holding in Indus Towers (Rs15/sh). At Rs51, on our
FY11E earning forecast for IDEA, the stock would trade at 20.1x P/E and
6.7x EV/EBITDA; FY12E EBITDA/EPS growth is pegged at 24%/11%.
Investment Summary – Maintain HOLD, TP Rs51
As the impact of 50p/min and per-second billing plans manifest in 2QFY10
financials and competition peaks (tariff wars, new launches) over the next six
months, we expect IDEA’s stock price to remain under pressure over this
period. Maintain HOLD; CMP is almost at our revised 12-mth TP of Rs51.
We expect IDEA’s FY10E-12E growth profile to remain robust (EBITDA/EPS
CAGR at 22%/13%), albeit from a sharply lower base as wireless business
profitability is dented from lower realizations and contribution to bottom line
from Indus Towers is only marginal; implied 2HFY10E net profit is Rs2.2 bn
(55% lower than normalized in 1HFY10 net profit). By our calculations, IDEA’s
50p/min) plan and (1p/sec) plan for prepaid customers are likely to yield a
blended (voice + data) ARPM typically ranging between Rs0.44-0.46 excluding
any inflow from start-up/lifetime packs on gross adds (detailed in Exhibits 8-
10); IDEA’s prepaid/postpaid combined ARPM was Rs0.56 in 2QFY10.
Our FY10E normalized net profit forecast for IDEA (Rs7 bn i.e. EPS of Rs2.2) is
19% below consensus. We are in-line / ahead of consensus earnings forecast
for IDEA for FY11E/12E respectively (Exhibit 3). FY10E-12E earnings growth is
expected to materialize as pricing pressure mitigates, economies of scale kickin
and contribution from Indus Towers rises progressively. Our earnings
forecast for IDEA assumes a Rs40 bn debt-funded outgo towards securing 3G
spectrum in 4QFY10, with interest charges & amortization for the same kicking
into the P&L from 2HFY11.
Our 12-mth TP for IDEA (Rs51/sh vs. Rs61/sh previously) is the sum of the
DCF-based value of its wireless business (Rs36/sh) and fair value of its 16%
holding in Indus Towers post a 30% marketability/holding company discount
(Rs15/sh). At Rs51, on our FY11E earning forecast, IDEA would trade at 20.1x
P/E and 6.7x EV/EBITDA; FY12E EBITDA/EPS growth is pegged at 24%/11%.
Key risks to earnings forecast / valuations for IDEA – (1) Being a wireless
pure-play, earnings are highly sensitive to KPIs (traffic & tariffs); (2) EPSbased
multiples appear rich, potentially leading to further downtrend in stock
price; (3) A one-time charge for ‘excess’ 2G spectrum would dent our earnings
forecast. We maintain that 3G-related debt-raising by IDEA will not stretch its
balance sheet to alarming levels; IDEA’s implied FY10E net-debt to equity and
net-debt to EBITDA ratios would be at 0.5x and 2.4x respectively.
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