Idea Cellular (Idea) reported 6.2% q-o-q revenue decline to Rs 81.3 bn as voice and data realisations plunged, impacted by heightened competition. However, Ebitda margin spurted by 200 bps to 27.0% on cost rationalistion and forex gains. Idea guided for Rs 60 bn capex in FY18, versus actual capex of Rs 78 bn in FY17. Management highlighted they are looking at active infrastructure sharing arrangement with 2-3 operators, which can significantly lower network costs and capex. As competitive intensity will keep industry revenue growth under pressure, we expect companies to adopt significant cost cutting measures. Maintain Hold with DCF-based target price of Rs 95.
Competitive pressure leads revenue headwinds
Idea reported 6.2% q-o-q dip in revenue as voice and data realisations fell 12.5% and 27.7% q-o-q, respectively, as it offered higher discounts to retain existing subscribers. However, the company’s data subscriber base declined by 6.4 million q-o-q as it withdrew trial offers. Price elasticity led to 10.3% and 16.7% data and voice volume increase, respectively. We expect realisations to remain under pressure as the competitive intensity remains elevated.
Wide-range measures to curtail costs, Capex
Idea managed to increase Ebitda margin by 200 bps q-o-q, primarily on lower network cost and SG&A. Lower network cost was due to rationalisation of low utilisation sites and write-back of excess provisions. We expect these steps to minimise cash burn anticipating active infra-sharing deal or impending merger with Vodafone. The company also lowered its capex guidance to Rs 60 bn as it is looking at active infrastructure sharing with 2-3 operators. We believe Idea and Vodafone are likely to align their capex to avoid network duplication and entail synergies.
Outlook and valuations: Prune estimates; maintain ‘HOLD’
We have cut our FY18/19e revenue and Ebitda by 8.6%/8.1% and 15.6%/11.3% due to the plunge in realisation following the extension of discount by RJIO. However, we have also cut our capex estimate by 20.8%/16.7% as Idea adopts active infrastructure sharing for capacity expansion. As the decline in Ebitda offsets capex drop, our target price in our DCF based model remains at Rs 95. At CMP, the stock is trading at 7.2x FY18e and 6.4x FY19e EV/Ebitda. Maintain ‘HOLD/SP’.
The industry is going through turmoil as Reliance Jio (RJIO) has created significant upfront capacity and is looking to gain proportionate volume and revenue share by offering discounts and extended trial offer. We expect the revenue growth for the industry to remain under pressure as incumbent operators extend discounts to retain their subscriber base. Hence we maintain negative stance on the sector.
We expect sustained competitive intensity to accelerate consolidation in the industry. Idea and Vodafone have also announced the consolidation of their operation which can bring in significant synergy benefit in the medium to long term. Stability in the competitive environment is pivotal for the sector’s profitable growth and we will wait for industry’s subscriber addition and churn to plateau before turning positive.