Buy Idea Cellular - Motilal Oswal

Idea Cellular (IDEA IN; Mkt Cap USD4.9b, CMP Rs69, Buy)

1QFY11 performance broadly in line: Idea Cellular's 1QFY11 results were broadly in line with 5.4% proforma revenue growth and ~50bp margin expansion on a like-to-like basis. Spice financials were fully consolidated in 1QFY11 v/s partial consolidation in 4QFY10. EBITDA grew ~3% YoY and QoQ on a proforma basis to Rs8.9b. EBITDA margin was impacted negatively by a higher provision for spectrum charges (~90bp impact) and Spice consolidation (~110bp impact). Adjusting for these EBITDA margin would have expanded by ~50bp. 1QFY11 consolidated revenue grew 22.8% YoY and 9.1% QoQ to Rs36.5b (in line with our expectations). Idea reported proforma traffic growth of ~13%. Higher traffic growth was offset by RPM decline of 5.5% QoQ to Rs0.44 (2.6% below estimates). Proforma PAT grew 30.1% QoQ but declined 29.3% YoY to Rs2.01b.

All operating metrics except RPM show positive trend: Idea reported 1QFY11 ARPU of Rs182 (1.8% above our estimate), down 21.6% YoY and 1.6% QoQ. RPM declined 24.3% YoY and 5.5% QoQ to Rs0.44. Minutes of use per subscriber increased ~4% YoY to 415. This is the third consecutive quarter of MOU growth for Idea post five straight quarters of declines. Churn rate increased QoQ from 7.7% in 4QFY10 to 8.2% in 1QFY11 reflecting continued hyper competition in the pre-paid segment.

Downgrading EBITDA estimates by ~4%, maintain Buy: We are downgrading EBITDA estimates by 4-5% to factor in a flatter trajectory of EBITDA loss in new circles (v/s higher decline in loss assumed earlier) and higher provision for spectrum charges. The operating environment improved with robust traffic growth but margin sustenance could be challenging going forward given a high volume base and potential increase in costs due to the 3G launch and MNP implementation. Idea trades at an EV/EBITDA of 9.3x FY11E and 6.9x FY12E. Maintain Buy with a price target of Rs77.

Source : Equity Bulls

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