Buy rating to Idea Cellular shares: Kotak

Updated: February 3, 2015 1:23 PM

Company once again gained market share on all fronts

Beats estimates again; wireless Ebitda growth accelerates to 37% y-o-y: There was little not to like about Idea’s Q3 earnings report even as the bears are likely to focus excessively on the weak voice RPM (revenue per minute) trajectory. We stay positive even as performance in the near term will likely be driven by developments on the two key externalities – spectrum auctions and R-Jio news flow.

Q3 results beat expectations again: Idea’s Q3 was another solid, above expectations quarter with the company beating our street-leading Ebitda ( (earnings before interest taxes depreciation and amortisation) estimates by 4.4% at the consolidated level and 4.6% at the standalone level. Standalone Ebitda growth of 37% year-on-year (which translated into consolidated Ebitda growth of 34% y-o-y) was the key highlight of the quarter.

Idea delivered an industry-leading 21.2% y-o-y/6% quarter-on-quarter growth in standalone revenues (21.6% y-o-y growth in pure wireless services revenues) and a 360 bps y-o-y/170 bps q-o-q Ebitda margin expansion. Revenue growth was aided by sustained strength in voice volumes and data revenues.

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Key headline financials–consolidated revenues grew 21% y-o-y and 5.9% q-o-q to R80.2 bn, in line with our estimates while consolidated Ebitda grew 34% y-o-y and 12% q-o-q to R27.5 bn, 4.4% ahead of our expectations. Reported profit after tax of R7.7 bn (+64% y-o-y, +1.5% q-o-q) was impacted by another change in its depreciation policy. Idea reduced the estimated depreciable life of core network assets further to nine years from ten; this resulted in excess depreciation charge of R2.6 bn for the quarter. Adjusted PAT of R9.4 bn would have meant a growth of 100% y-o-y. 9M (month)FY15 revenues, Ebitda and PAT grew 19%, 27% and 62% respectively. EPS (earnings per share) for 9MFY15 was R6.2 (up 49% y-o-y) on an expanded post-QIP (qualified institutional placement) share count.

Voice RPM weakens but other metrics more than compensate: Idea’s pure wireless services revenue growth accelerated further to 21.6% y-o-y, a combination of 18.1% y-o-y voice volume growth (nearly 3x industry voice traffic growth) and 3% overall RPM expansion. Voice RPM declined further by 1.7% q-o-q (and 5.6% y-o-y) to 35.6 paise/min. and is now almost back to the pre-improvement levels of around 35 paise/min.

Data revenue momentum was sustained with 101% y-o-y data revenue growth on the back of 121% y-o-y data volume growth. Data realisations inched up q-o-q while being down 9% y-o-y at 26.9 paise/min. Strong data growth was as expected led by 3G business, which saw volume and revenue growth of 164% and 152% y-o-y, respectively. We believe that Idea once again gained share on all fronts—be it voice volumes, voice revenues, data volumes, data revenues, overall revenues and Ebitda.

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Why the negative surprise on voice RPM does not worry us: Prima facie, the 1.7% sequential and 5.6% y-o-y decline in voice RPM was clearly a negative and contrary to the general expectations of a rise in voice RPM. Two numbers say why it does not worry us –

* Voice volume growth of 18.1% – Idea’s aggressiveness on voice pricing clearly is a well thought-through strategy and the company is delivering on the strategic intent, and

* Standalone wireless Ebitda growth of 37%–why use the voice RPM lever when the overall equation (of pricing, volumes, data growth and costs) is yielding the requisite/desired/target Ebitda growth; under-pressure voice RPM keeps challengers’ P&Ls (profit & loss account) from improving, a clear long-term positive.

Another aspect to consider is the likely reaction of Bharti and Vodafone, which are underperforming Idea materially on voice volume growth. Two points here – (i) underperformance is not as stark on voice revenue growth; each company plays a different volume/pricing equation and has a different target growth rate; Bharti and Vodafone may not necessarily be much concerned about underperformance on voice volumes, and (ii) empirical data shows Idea’s voice volume market share gains over the past few years have not been driven by pricing differential alone. Attributing market share gains to pricing is easy/ convenient, but misses the point.

—Kotatk Institutional Equities

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