Idea Cellular –Sell- Anand Rathi
Management expects both minutes-growth and price/ARPM erosion to moderate vs. 3Q levels of +15% q-o-q and -8%, respectively. Net result is likely to be lower revenue growth in 4Q than 5.9% in 3Q. We currently forecast 4.2% rev growth and flat EBITDA in 4Q. Minutes-growth in 3Q was also helped by transient factors, such as pull back of lost 2Q traffic post-tariff cuts by Idea, base effect—weak 2Q due to delayed monsoons, and seasonality (festivals, roaming).
Idea is more operationally and financially leveraged than peers. Adjusting for pro-rata towers owned in Indus, 60% of Idea’s BTS (incl. Spice) are on rented towers vs. 30% in the case of Bharti. Also, Idea’s traffic per BTS in 3Q was 30% lower vs. Bharti’s; while this is primarily due to Bharti’s better spectrum profile (more 900MHz) and higher radio capacity deployed per BTS, management highlighted that Idea can create additional minutes-capacity at very low incremental costs (capex+opex).
Finally, Idea’s net interest costs are 11% of EBITDA (net debt is 0.6 X Equity) indicating financial leverage. We note that despite similar 3Q ARPM drop, Idea’s EBITDA margin was down 80bps vs. Bharti’s 200bps, thanks to Idea’s superior traffic growth.
Management expects FY10 capex (ex-Indus) in the Rs35-40 billion range (vs. our Rs40bn forecast). Furthermore, 2G capex in FY11 may be even lower than Rs30 billion (vs. Rs35 billion forecast). Separately, management said that court approvals have been obtained for Spice merger, which is likely to become effective from March or April 2010.
Management believes that access to liquidity would not change the un-viability of new entrants, and distress could set in sooner than market’s expectations. Furthermore, 3G auctions would make the spectrum (1800Mhz) held by new entrants even less valuable. Idea believes that govt. should deregulate M&A, since the entry was also deregulated (effectively), post last round of UAS licensing
Delay in 3G/MNP, combined with a more attractive entry point (10-15% below current levels) would make us more constructive on Idea stock. Our September 2010 target price is Rs65.
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