ICICI Direct may upgrade Idea to buy; bullish on Airtel

Post spectacular Q1 FY14 earnings, shares of Idea Cellular are likely to appreciate more from hereon, says Karan Mittal of ICICI Direct.

ICICI Direct will mostly upgrade the stock to a ‘Buy’ from current ‘Hold’. It has already upgraded its estimates, but will take a final call post Idea’s management conference scheduled today afternoon. Also Read: Cabinet approves 100% FDI in telecom
Despite foreign exchange debt overhang, he is positive on Bharti Airtel on the back of its core performance. Below is the verbatim transcript of Karan Mittal's interview on CNBC-TV18 Q: Let me begin with the place where there is more disagreement with bulls and bears abounding. Idea Cellular was an impressive performance but is all the good news in the price?
A: I think the price has run up quite significant in the last few weeks but having said that the performance was way above expectations. So, the kind of average revenue per minute (ARPM) expansion that Idea has exhibited, no one would have expected that and especially when they are following dual strategy of aggressive pricing in new circles and reducing the discount offers in the legacy circles but they have reported highest in the industry, ARPM expansion when you look at the blended ARPM. So, I do not think that performance would be priced in. I am sure the stock should appreciate more from hereon. Q: Have you upgraded your earnings per share (EPS) estimates or margin estimates on Idea post the numbers and where would they stand at?
A: We have upgraded our estimates but we will take a final call post the management conference call this afternoon. One thing is for sure, we would mostly upgrade it to a buy from hold earlier. Q: We have seen decent performance from Bharti Airtel, but there is a big overhang of Fx debt. Where does it stand at this point in time?
A: The core performance was way above expectation for Bharti Airtel, but tele media business and also to a large extent African operations have been disappointing for Airtel and the debt is a good overhang but they have reduced their debt partially in this quarter, the Qatar Foundation money that they received. Going forward, it will be a slow decline in debt. So, there remains an overhang but still we remain positive on the stock for its sheer core performance. We have a target price of Rs 385 with a strong buy rating on Airtel.
_PAGEBREAK_ Q: This Rs 385 is a one year target price on Bharti Airtel?
A: Yes, one year target. Q: What have you made of Reliance Communications’ numbers and how do they stack up compared to its peers and also the kind of stock price movement that it has seen?
A: The ARPM expansion has been in line with the industry, though slightly lesser than its peers but the only thing that we were concerned about was debt. So, the last three-four months they have taken several steps to reduce debt. Therefore, once that starts reflecting in the numbers then the stock should appreciate but it’s more or less priced in the stock and the tele media and global business was disappointing for RComm.
One big question mark on RComm’s performance would be below the EBITDA line performance again, be it because of the interest cost or changing in the depreciation policy. It keeps us surprising every quarter. However, at Rs 145, it looks a little expensive at current levels. Q: Have you for Bharti and for Idea also priced in the fact that their 2G renewals will come up, especially for Idea, in almost all circles, as also there could be some disruption, I mean competitive landscape could change because of 100 percent foreign direct investment (FDI)?
A: They have been stronger players in the telecom business for quite some time whether it’s Uninor or Etisalat. I do not think 100 percent FDI would change the norms or the landscape significantly in the telecom business especially when the voice business seems to be more or less saturated in terms of penetration. So, I do not think any new player getting into the market will gain that kind of a market access that would threaten the likes of Idea or Vodafone or Bharti.
But when you say about licence renewal, I think that is an overhang on the overall telecom sector, more than Idea it will be on Vodafone and Bharti because they have a couple of spectrum coming up for renewal in the next two years. Idea is still a long way to go for. But looking at the overall regulatory stance that we have seen, developments that we have seen in the last couple of weeks, it seems that regulatory bodies are also taking cognizance of the fact that the telecom industry is not in as good health as it was at the time of 2G and 3G auctions. So, that bodes well for the industry and it is quite possible that we will see a good reduction in the auction prices and the spectrum renewable prices as well. Q: We have already seen revenue per minute hardening for the entire industry by 4-6 percent in the quarter gone by. As an analyst, what is your expectation for the industry per se, how much further can revenue per minute increase per quarter?
A: We have seen higher than expectation ARPM expansion this quarter. Next quarter should be more or less steady or a very tepid recovery and the reason being that it is seasonally weak quarter for telecom companies. Having said that, I see major expansions coming up in FY15 once the data revenue starts picking up even more, so probably for the rest of FY14 we will see a very tepid or slight recovery in the ARPMs from hereon.