Jan 08, 2017 04:47 PM IST IST | Source: Moneycontrol.com

Idea slips on downgrade, BoAML sees further weakness in revenue

Bank of America Merrill Lynch has downgraded Idea Cellular to underperform from neutral as it expects sustained weakness in company's revenues led by slowing revenue growth and negative operational leverage. The stock fell nearly 3 percent intraday Friday.

Moneycontrol Bureau

Bank of America Merrill Lynch has downgraded Idea Cellular to underperform from neutral as it expects sustained weakness in company's revenues led by slowing revenue growth and negative operational leverage. The stock fell nearly 3 percent intraday Friday.

With slowing revenue growth, the brokerage house expects the negative operational leverage to materially hit EBITDA especially with expected increase in network operating expenses/SG&A (selling, general and administration).

It slashed target price by 9 percent to Rs 69 (from Rs 76 earlier) after cutting FY17-19 estimates for EBITDA by 4-7 percent and FY17/18/19 estimates for net income to negative Rs 370/1,140/1,160 crore (from Rs 250 crore/negative Rs 750 crore/negative Rs 740 crore).

BoAML also expects near-term earnings to be materially hit by combined effect of demonetisation and Reliance Jio's free offering. It now expects 10/20 percent QoQ decline in voice revenue per minute and data average realisation per MB in Q3 (against 1-4 percent decline before) when Idea report and estimate continued weakness to flow in subsequent quarters as well.

Idea is currently trading at 8.5x FY17 EV/EBITDA, at a premium to other Asian telecom companies trading at 6.7x, and has already underperformed the market by 50 percent over the last year, the research house says.

BoAML sees limited visibility of any re-rating in next 12 months as the market would likely witness further tariff declines before things stabilise.

With Reliance Jio extending free offer by 3 months, the brokerage house is seeing telecom companies like Bharti Airtel responding by offering aggressive offerings like below.

According to the research house, further tariff cuts will happen around the time Jio pulls off its free offering. Idea has yet not responded to Bharti's recent tariff plans.

At 14:57 hours IST, the stock was quoting at Rs 73.00, down Rs 1.70, or 2.28 percent on the BSE.

Disclosure: Reliance Industries, the parent company of Reliance Jio, owns Network 18 that publishes Moneycontrol.com.

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