The key positive for Idea Cellular Ltd has been the fading competitive intensity, which helped withdrawal of promotional offers. Receding competitive intensity and strong Q1 operational performance lead us to revise upward our FY14 RPM growth to 9% (5% earlier) and Ebitda margin by 210bps/130bps for FY14/FY15, respectively. Maintain Hold with a revised TP (target price) of Rs 156.
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RPMs surge, data growth explodes: Ideas Q1 RPMs surged by 6.1% on a sequential basis while data volume was up a whopping 20.8% along with overall minutes growth of 2.8%. The company also reclassified Mumbai and Bihar under ESA (established service areas) against NSA (new service areas) earlier, due to improved performance. It aims to have a profitable growth model rather than a simple growth model.
Reducing competitive -intensity provides relief: In line with our expectation of competition receding with the cancellation of licences, the company acknowledged a reasonable reduction in intensity, which enabled it to withdraw promotional offers to a large extent. This has helped it post a volume growth despite higher tariffs and save on subscriber acquisition cost. The company has got an enabling resolution approved from the board for equity dilution which will be valid for a year. It will raise funds only if required for spectrum renewals and maintained that it would be able to incur current capex (capital expenditure) from internal cash flows.
Outlook and valuations: The companys net debt/Ebitda of 1.4x (times) is one of the best in the industry and current cash flows seem more than sufficient to service the debt. However, the CMP (current market price) of Rs 155 factors in all the positives. Maintain Hold /SP with a revised target price of Rs 156 (based on discounted cash flows).
Investment theme: The telecom sector is going through uncertain times as there are pressures on all countsregulatory, operational and financial. We believe, operators are beginning to realise that their focus on subscriber market share is leading to a dilution in profitability, hence expect RPMs to firm up. Idea faces a risk of regulatory costs, which, is not discounted fully in the stock. But it is expected to still deliver superior Ebitda growth compared to peers.
Key risks: Any further regulatory changes, particularly removal of roaming charges, could impact our estimates meaningfully. If Idea chooses to return some excess spectrum to minimise the impact of cash outflows, then its growth would slow down, thereby disappointing the street.