Accumulate Idea Cellular; target Rs 90: KRChoksey

KRChoksey is bullish on Idea Cellular and has recommended accumulate rating on the stock with a target price of Rs 90 in its October 25, 2012 research report.

"Idea Cellular's Q2FY13 numbers were in line with our estimates. The company reported net sales of Rs 5314crs degrowth of 3.4% QoQ. Seasonally weak quarter led to decline in MoUs and degrowth of net subscriber base resulted in decline of net sales on sequential quarter. At EBITDA level, the company reported Rs 1423crs, marginally down by 0.9% QoQ led by operating cost rationalization. Lower subscriber acquisition cost for the quarter helped to improve EBITDA margins by 70 bps QoQ to 26.8%.  Net profit for the quarter was Rs 240crs, higher by 2.5% over Q1FY13 as interest expense decreased. Consequently net profit margin increased by 20 bps to 4.5%. Smart up move in data revenue came as a positive surprise. The management has guided healthy subscriber addition in rural in future. The Indian telecom industry has lowest ARPM in the world and the management expects it to inch up post spectrum auction. We expect healthy revenue growth primarily led by growth in subscribers and improvement in ARPU both in voice and data segment. Lower operating and interest cost will lead to margin improvement in FY14E.

Seasonally weak quarter led to deterioration of key operating metrics: Idea reported first time revenue decline on QoQ as seasonally weak quarter resulted in lower MoUs and ARPU coupled with stiff competition leading to degrowth in subscriber base. Net sales declined by 3.4% as a combination of 1.4% QoQ decline in subscriber base to 115.5mn and 5.1% decline in ARPUs to Rs 148.  MoUs were lower by 5.3% QoQ to 359minutes. Contribution of MVAS increased by 110bps over Q1FY13 to 15.6% led by uptick in data revenue which increased by 6.3% QoQ to Rs 50. Increase in subscriber base in rural area and higher ARPU led by data services will drive healthy growth in revenue in FY14E.

EBITDA margins on an upward move: The company reported another quarter of EBITDA margin improvement. Lower subscriber acquisition cost helped to improve EBITDA margins by 70bps QoQ to 26.8%. We believe operating margins improvement on YoY basis for FY13E and FY14E will be driven by cost rationalization on all the parameters.

Our View: Decline in net subscriber base and lower ARPU due to seasonally weak quarter led to degrowth in revenues for Q2FY13. However subscriber addition in rural area and ARPU growth led by improvement in ARPM and increased contribution of data services will be key triggers for revenue growth going forward. Cost rationalization at operating level and lower interest expenses will drive margins upwards. The stock is trading at 5.1x EV/EBITDA to its FY14E earnings. We recommend ACCUMULATE on the stock with a target price of Rs 90," says KRChoksey research report.

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