Sell Idea Cellular; target of Rs 76: Nirmal Bang

Nirmal Bang is bearish on Idea Cellular and has recommended sell rating on the stock with a target of Rs 76 in its July 24, 2012 research report.

“Idea Cellular’s revenue/minute (RPM) fell 2.4% QoQ in 1QFY13, exerting pressure on revenue growth and more importantly on margins, which were below our and consensus estimates by 189bps and 101bps, respectively. Slow revenue growth hurt Idea more than what we expected; adjusted EBITDA margin fell 198bps QoQ. Thus, even as minutes of usage (MoU) grew 5.3% QoQ to 130.9bn, revenue growth was tepid and the impact on margins severe, reflecting a highly competitive market. Average revenue/user (ARPU) fell 2.5% QoQ (Rs156/month, our estimate Rs160/month). Lower margins, higher depreciation and forex losses led to a 2% QoQ fall in net profit, 22.2% below our estimate and 21.6% below consensus estimates. Hyper-competition persists, RPM remains under pressure, debt remains high and regulatory risks remain a reality, with the prospects of cash outflows in the form of spectrum charges. At the CMP, the stock trades at 5.8x EV/EBITDA on FY13E EBITDA. We retain our Sell rating with a revised TP of Rs76 (from Rs81 earlier) as we have pruned FY13E/FY14E EBITDA estimates by 6% each.”

“Idea’s 1QFY13 top-line witnessed a subdued 2.5% QoQ growth (Rs55bn, exactly in line with our estimate but slightly below consensus). While MoU growth was healthy at 5.3% QoQ, RPM declined 2.4% QoQ to 41.2 paise owing to heightened competition, Subdued revenue growth had a greater impact on margins than what we had expected, as adjusted for the one-off item of Rs1.5bn related to licence fees in 4QFY12, EBITDA margin fell 198bps QoQ, well below our and consensus estimates. This was a key disappointment in 1QFY13. Owing to lower margins, higher depreciation owing to revision in useful life of fixed assets (Rs480mn impact) and forex loss of Rs245mn (Rs135mn gain in 4QFY12), Idea’s net profit declined 2% QoQ, over 20% below our and consensus estimates. Adjusted for the depreciation impact and tax, net profit would have been higher by 11.7% QoQ, but it is below our estimate by 11.3% and below consensus estimate by 10.6%.”

“Hyper-competition persists, RPM remains under pressure, debt stays high and regulatory risks remain a reality, with the prospects of cash outflows in the form of spectrum charges, leading to possibility of raising more debt. At the CMP, the stock trades at 5.6x EV/EBITDA on FY13E EBITDA. We retain our Sell rating with a revised TP of Rs76 (Rs81) as we have cut FY13E/FY14E EBITDA by 6% each,” says Nirmal Bang research report.

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