Idea delivered a decent quarter in a challenging environment; these challenges are likely to amplify in the near term. We believe that the company is focusing on the right things now and should be able to hold fort. Moreover, we believe that current valuations amply price in risks. Our target price stands revised to Rs 100/share (R105 earlier) on cuts in estimates. We remain positive on the stock; reiterate BUY.
Key changes to our earnings model
We have cut our revenue estimates by 0.4-2% over FY2017-19e as we build in continued pressure on the realisations front on both voice and data, which more than offsets higher volumes on both fronts. On the Ebitda front, we have built in slight contraction in margins for FY2017e due to negative operating leverage; FY2018e and FY2019e margins have been largely retained. These cuts together with increasing amortisation and interest (driven by spectrum purchases) lead to sharper cuts in EPS forecasts. On the capex front, we have increased the total outlay for FY2017e in line with the management’s revised guidance.
Read-through from Bharti’s results
Directionally speaking, Bharti reported similar trends (from a topline perspective) as Idea. Bharti’s data volumes growth came in at 13% on a q-o-q basis similar to Idea’s 15%, data realisations for both fell by close to 10%. From a ‘wireless revenue’ perspective both delivered close to 2% decline q-o-q and about 7-8% growth y-o-y. It is clear that both operators focused on a volume-led strategy (perhaps a tactical response to the R-Jio threat) in Q2FY17 and we expect the same going forward as well.
However, the major difference between the two was Bharti maintaining its Ebitda margins q-o-q at 42.4%, while Idea’s margins declined close to 200 bps q-o-q. While it is difficult to assess the exact reason (Bharti does not provide detailed cost break-up for its wireless operations), Idea’s higher network operating costs and lower scale are perhaps the main drivers for its relative underperformance. We believe pressure on Idea’s margins would continue in the near future.
Overall view: brace for challenges ahead
The next few quarters are going to be a challenge for the incumbents as the full impact of R-Jio’s launch starts weighing in on operators’ financials. However, we believe that the company’s renewed focus on volumes and subscriber acquisition will hold it in good stead. Moreover, we believe that the company’s current stock level more than prices in these risks. Our target price stands revised at
Rs100/share from R105/share earlier, BUY stays. We value the standalone business at 7X Sep 2018e Ebitda and our Indus stake value is DCF-based.
Key takeaways from the earnings call
Minutes growth trajectory: In Jan 2016, the company experimented with increasing effective voice rates in order to bring much-needed discipline with respect to pricing; however, other operators did not follow suit as a result of which the company lost subscribers/failed to acquire subscribers, which has resulted in its y-o-y volume growth taking a hit. Idea’s focus going forward would be a volume-led strategy and the company has set a target of increasing its subscriber base by 20-25 million subscribers on an annual basis as compared to 15 million subscribers added over the trailing 12 months.
Data growth versus investments: Idea (like other operators) has been rolling out mobile broadband sites very aggressively; this has led to coverage expanding substantially. However, asset utilisation is currently extremely low. Currently, 4G average realisations are much lower than the average data realisation (due to more freebies), 2G is the highest and 3G is in between 2G and 4G.
Capex guidance: The company’s initial capex guidance of R65-70 bn for FY2017 was calculated with a target of deploying 103,000 MBB sites. However, post the auctions the company re-assessed its site requirements and now plans to deploy 2G data sites on 85% of all 2G sites, 3G on 80% of all 2G sites and 4G sites on 50% of all 2G sites which results in an approximate deployment of 200,000 sites. Of the incremental 97,000 sites the company plans to deploy about 10,000 sites in FY2017 itself resulting in an additional capex outlay of R10 bn over their initial guidance leading to a revised guidance of Rs 75-80 bn.
POI fine recommended by TRAI: The management categorically stated that Idea is not violating any regulations; they have sought out a legal opinion and there is no case of any violation. Spectrum payments and capitalisation: Idea has paid close to R64 bn as upfront payment for spectrum bid by the company in the Oct-16 auctions; the rest will be paid over ten years after a moratorium of two years. On the impact on P&L from the acquired spectrum, the company mentioned that the impact would be marginal in H2FY17e as most of the interest on the new spectrum would be capitalised.