Underperform rating to Idea Cellular shares: Jefferies

Updated: Nov 4 2013, 17:11pm hrs
Idea Cellular Ltd reported an increase in realisations; however, volumes were much weaker than expectedseasonality is getting pronounced every year. We revise our estimates and PT (price target), but would not chase the stock as: (i) regulatory flip-flop continues, (ii) competitive disruption with the entry of a stronger player in early 2014, and (iii) additional overhang of stake sale.

In-line revenues: Consolidated revenues at R63.2bn were down 3.3% quarter-on-quarter. While realisations (ARPMaverage revenue per minute) were up by 2.3% q-o-q, seasonality played spoilsport and minutes of usage (MoU) were down 7.5%. Volume growth was down 5.8% q-o-q. The management suggested that the improvement in ARPM was the tail effect of the withdrawal of freebies and discounted minutes since early Q1, they will watch the impact carefully before taking a call for the future.

Margins sustain: Ebitda ticked down by 60bps q-o-q as (negative) operating leverage kicked in. Roaming and access charges (down 160bps) and licence & spectrum charges provided the tailwinds while network operational costs (up 150bps q-o-q) and personnel expenses (up 80bps q-o-q) were the significant headwinds. As volume growth comes back, we expect margins to recover.

Capex lower than expected: Reported capex was R8.8bn, down 10% y-o-y. However, given the INR depreciation, our calculations suggest capex of R11.6bn, up 30% y-o-y. Guidance for FY14 remains at R35bn. Our belief is that capex for the company (and industry) will continue to remain high as it moves to newer areas for subscriber penetration and adds infrastructure in existing areas in order to improve service quality. Data & 3G penetration would entail additional capex, going forward.

Revise estimates & target: Incorporating Q2 results, our revenue, Ebitda, and EPS estimates are largely unchanged (-1% to +2%) over FY14-15e. Our new PT is R145. The approved QIP (qualified institutional placement) of R30bn and preferential issue of R7.5bn to the Axiata Group remains an overhang.

Other key highlights

* Data is now 8.7% of revenues (up 330 bps y-o-y) while non-data is 7.4% of revenues (down 280 bps y-o-y). Therefore, VAS (value added services) revenues are up 50 bps y-o-y.

n The non-data VAS revenues continue to remain under pressure due to: (i) Trais new regulation of double confirmation, and (ii) the emerging threat from free messenger and chat software.

* Data subscribers saw a healthy addition of 2.7m in the quarter (up 9% q-o-q). Data volume was up 27% q-o-q while ARPU (average revenue per user) was up 2% q-o-q. Data realisations were down 7% q-o-q, due to competitive pressures.

* Capex and Net debt (R11.6bn and R105.5bn respectively, according to our calculations, were higher each by R2.5bn due to forex loss.

* Current utilisation of 3G networks is 20-25%, which means that there is significant headroom left.