1. Buy rating on Idea: An un-IDEA(L) quarter breaks impressive streak

Buy rating on Idea: An un-IDEA(L) quarter breaks impressive streak

A subdued, albeit expected, third quarter of fiscal 2016 broke Idea’s 11-quarter long streak of 20%+ y-o-y Ebitda growth.

By: | Published: February 1, 2016 12:06 AM

A subdued, albeit expected, third quarter of fiscal 2016 broke Idea’s 11-quarter long streak of 20%+ y-o-y Ebitda growth. The deceleration reflects —(i) increased competitive intensity in the market reflecting in sustained pressure on realisations, (ii) surprising slowdown in data volume growth momentum, and (iii) pressure on margins on account of accelerated network investments and higher S&M costs. #1 and #3 are short-term pressure points, in our view; it is #2 that worries us incrementally. Another negative was upward revision in capex guidance once again. We shall review our estimates and TP post the earnings call.

Reported headline numbers weak, albeit in line with estimates

Consolidated results: Idea’s headline consolidated results were broadly in line with our estimates with revenues coming in at R90.1 bn (our estimate was R90.1 bn), up 3.7% q-o-q and 12.4% y-o-y. Ebitda grew 2.3% q-o-q and 13.7% y-o-y to R31.3 bn versus our estimate of R31.5 bn. Recurring PAT was down 6% q-o-q and flat y-o-y at R7.64 bn (our estimate was R7.3 bn) due to higher interest and amortisation. Ebitda margins came under pressure due to cost pressures on network opex (accelerated 3G/4G network expansion) and SG&A (increase in competitive intensity) front.

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Standalone wireless results: Idea’s standalone revenues were up 3.8% q-o-q and 12.4% y-o-y to R90.1 bn while Ebitda was up 2.7% q-o-q and 14.7% y-o-y to R28.5 bn. Even as the numbers were broadly in line with our expectations, they reflect sharp deterioration in y-o-y growth momentum and are disappointing to that extent. Ebitda margins were up 60 bps on a y-o-y basis but have declined nearly 200 bps in the past two quarters.

We see value in the stock though remain cautious of the prevailing market context

Increase in competitive intensity is hitting telcos in more ways than one—(i) sustained pressure on realisations, and (ii) higher costs on the subscriber acquisition. Adding to the pressure is the accelerated investments on 3G/4G network expansion without any uptick in data volume growth momentum. Q3FY16 earnings print clearly does not help in the backdrop of alreadyweak market sentiments on the sector ahead of R-Jio’s commercial launch. Does the 3QFY16 earnings print weaken our long-term fundamental investment thesis on the wireless incumbents? No. Does it make near-term prognosis bleaker? Perhaps yes.

We expect modest cuts in our Ebitda estimates, which when combined with high leverage and increase in capex assumptions will mean sharper cuts to EPS estimates. We shall review our estimates and target price in the coming days.

Key operational highlights: the volume-realisation conundrum continues

Pure wireless revenues grew 4% q-o-q and 13% y-o-y to R89.2 bn, marginally ahead of our expectations. Y-o-y comps continue to be impacted by IUC rate reduction (effective March 1, 2015). Adjusted revenue growth was nearly 17% y-o-y, nearly 1.8-2X industry levels.

Voice revenue growth trajectory slipped further to 9.7% y-o-y (on an IUC-adjusted basis; 4.4% on a reported basis) as voice realisations slipped further (down 2.8% q-o-q and 10.7% y-o-y to 31.8 paise/min). Even adjusted for IUC impact, voice RPM was down nearly 6.2% y-o-y. On the positive side, Idea sustained its industry-leading voice traffic growth trajectory with 5% q-o-q and 17% y-o-y growth in total voice minutes to 199.2 bn min.

Data revenue growth trajectory too slipped materially. Data revenues grew 45.7% y-o-y (and 7.2% q-o-q), a sharp deterioration from 80-100% y-o-y growth levels reported over the past many quarters. Volume growth slowed down to 75.8% y-o-y while realisations (ARMB) dipped a steep 17% y-o-y and 4.7% q-o-q to 22.3 paise/MB.

Total data subs base grew to 41.4 mn, flat on a q-o-q basis (impacted by revision in definition of data subs), while data ARPU was up 15% y-o-y to R145 per data sub. 3G subs base was 21.2 mn at end-Q3FY16, up 1.6 mn q-o-q and 8 mn y-o-y. 3G data volumes grew 115% y-o-y and 3G data revenues grew 73% y-o-y. 3G now accounts for 66.4% of total data revenues. 2G data revenues have more or less stopped growing; y-o-y growth in 2G data revenues was a modest 11.2% y-o-y.

A big negative was another upward revision (third in the past 9 months!) in FY2016e capex guidance to R75 bn from R65 bn last guided. Even as we were factoring in a capex number slightly higher than management’s last guided number, the extent of revision is a surprise; also, qualitatively speaking, this is the first time in many years that Idea management does not appear completely in control of its business plans. This qualitative negative is perhaps our biggest takeaway from the Q3FY16 earnings print.

Ebitda margin declined by 50 bps q-o-q (up 60 bps y-o-y; down 210 bps from Q1FY16 levels) SG&A increased 50 bps as % of sales (q-o-q), a reflection of more intense competitive intensity in the marketplace. Also, churn increased to 5.3% on blended basis from 5.1% in Q2 and from 4.2% in Q3FY15. Network opex as % of sales also increased 10 bps q-o-q. This might have been driven by aggressive new site rollout; we note that Idea added a total of 7,678 3G/4G sites (20% q-o-q increase) and 3,239 2G sites (3% q-o-q increase) in Q3FY16.

Consolidated net debt, including deferred spectrum liabilities not recognized in the reported balance sheet, was down marginally q-o-q to R385 bn at end-3QFY16 from R389 bn at end-2QFY16. Net-debt-to- Q3FY16-annualised Ebitda works out to about 3.1X. Standalone capex for the quarter was R23.1 bn taking 9MFY16 capex to R54.1 bn.

Non-voice, non-data (essentially VAS + ICR revenues + in-roaming) revenues grew a healthy 9% q-o-q and 32% y-o-y to R7.73 bn. We suspect this may have been on account of a sharp jump in in-roaming revenues. Idea’s VLR ratio jumped up materially in Q3FY16. This number moves up and down depending on the # of in-roamers in a specific period. Increase in in-roamers may also reflect further network shutdowns by challengers and should benefit Bharti and Vodafone as well.

Sequential revenue growth in Idea’s new circles at 4.7% q-o-q was in a similar ballpark as the 3.7% q-o-q growth delivered in the established circles.

 

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