Sell Idea Cellular; target of Rs 93: Nirmal Bang

Nirmal Bang is bearish on Idea Cellular and has recommended sell rating on the stock with a target price of Rs 93, in its January 30, 2013 research report.

Idea has an active subscriber market share of 15.8%, well ahead of its susbcriber market share of less than 13.0%.

In 3QFY13, rural customers showed a rebound in usage, leading to strong growth in minutes of usage (MoU) of 5.2% QoQ at 132.2bn.

Apart from this, active subscriber addition in 3QFY13 was 2.9mn (versus just 0.3mn in 2QFY13), which, along with the rebound in the usage by rural users, was key reason for the 5.2% QoQ rise in MoU.

While value-added services (VAS) revenue declined 1.8% QoQ owing to new subscriber verification norms, data revenue growth was healthy, at nearly 11% QoQ, with non-data VAS revenue (including SMS) witnessing a decline of 8.4% QoQ.

Idea has an active 3G subscriber base of 4.1mn (3.7mn in 2QFY13), with incremental average revenue per user (ARPU) of Rs97 for 3G data services (Rs 87 in 2QFY13).

Going forward, Idea believes data adoption in Indian market will be more a function of lower device prices rather than just data tariff; on this front, it has launched its fifth 3G handset called IVORY.

As regards the reasons behind the decline in margin in 3QFY13, Idea cited rise in network costs owing to higher diesel prices, higher advertising and business promotion (ABP) expenses and also the rise in subscriber acquisition costs owing to stricter verification norms; going forward, the telecom major expects customer acquisition costs to decline.

In 4QFY13E, Idea expects ABP spending at a similar level as in 3QFY13, as a percentage of revenue.

The company has reduced its FY13 capex guidance to Rs30bn from Rs35bn citing two factors – the delay in 2G auction, which delayed the launch of its services in new areas, and volume growth was also lower than expected, leading to a cutback in capex, which is being more carefully calibrated.

The number of employees rose significantly from 7,971 in 2QFY13 to 9,502 in 3QFY13 due to new subscriber verification norms, which require the subscribers to be verified by company employees, thereby leading the telecom major to hire employees for this purpose.

In the 2G auction, Idea won back spectrum in all seven circles where its licences were cancelled and acquired one block of spectrum in Bihar, at a total cost of Rs20.3bn; the entry fee of Rs6.9bn has been adjusted against this.

The Department of Telecommunications (DoT) has sent a demand notice to Idea towards one-time 'excess spectrum charges of over Rs21bn, including Rs3.7bn towards retrospective charges from 1 July 2008 to 31 December 2012, with the balance towards prospective charges above 4.4MHz effective 1 January 2013. Idea has filed a petition in the Bombay High Court and the court has directed the DoT not to take coercive action until its next hearing scheduled on 1 March 2013. Sell the stock with a target price of Rs 93," says Nirmal Bang research report.

FIIs holding more than 30% in Indian cos

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