Buy Idea Cellular; target of Rs 108: FinQuest Securities

FinQuest Securities is bullish on Idea Cellular and has recommended buy rating on the stock with a target of Rs 108 in its October 26, 2012 research report.

“Idea Cellular, higher subscriber numbers helped the company to post decent Y-o-Y growth in mobile revenue despite poor average revenue per user (ARPU) and falling minutes of usage (MoU). The performance Q-o-Q was very disappointing due to the seasonality factor. Q2 usually is the weakest quarter for the telecom industry due to monsoon and the fact is further compounded due to Idea Cellular's increasing rural subscriber base. For the first time though Idea Cellular posted Q-o-Q decline in subscriber numbers. The total subscribers on the company's network increased 15.3% Y-o-Y (down 1.7% Q-o-Q) to 115.5 mn. Nevertheless the consolidated total revenue for the company came in at Rs 53.07 bn (+15.2% Y-o-Y, contracted 3.5% Q-o-Q); in line with our estimate of Rs 53.7 bn.”

“Increased number of subscribers from the rural circles caused the key performance indicators (KPIs) during the quarter to deteriorate as both the ARPU and MoU fell. The ARPU fell 4.5% Yo- Y (5.1% Q-o-Q) to Rs 148, while the MoU fell 1.4% Y-o-Y (5.3% Q-o-Q) to 359 minutes. However the average realized revenue per minute (ARPM) fell 3.2% Y-o-Y (flat Q-o-Q) to 42 paisa. The good thing to note is the improvement in margins as the company rationalized its various cost heads. The increase in data revenue is another major positive as it is expected to be a major component of mobile revenue and a key differentiator for the operators. The VAS revenue as % of service revenue increased to 15.6% in Q2FY13 as compared to 14.5% during the previous quarter and 13.2% during Q2FY12. The data revenue as % of service revenue rose to 5.4% in Q2FY13 as compared to 4.5% in Q1FY13, while the data subscribers increased to 18.92 mn in Q2FY13 as compared to 18.30 mn in Q1FY13. The total operating expenses rose by 13.3% Y-o-Y (fell 4.3% Q-o-Q) to Rs 38.92 bn in Q2FY13 primarily because the company trimmed the subscriber acquisition cost and other promotional expenses as compared to the previous quarter. The license fee also reduced as compared to the previous quarter as new rate slab got implemented. Thus the EBIDTA margin rose by 120 bps Y-o-Y (60 bps Q-o-Q) to 26.7%. The absolute EBIDTA rose 20.5% Y-o-Y (marginally lower Qo- Q) to Rs 14.15 bn, in line with our estimate of 13.9 bn.”

“We are really not bothered about the company's operational outlook, as we think that the consolidation in the industry is inevitable going ahead, which would benefit Idea Cellular in a big way. We see this as a trigger for Idea Cellular's newer circles narrowing its gestation cycle. Nevertheless the short term pressure on profitability would remain considering the regulatory pressure and the potential regulatory payments that needs to be made in the form of one time spectrum charges and the penalty due to 3G roaming arrangement that the company has entered into with other incumbents (if the TDSAT gives an adverse verdict on this front), especially at a time when the competitive intensity has again peaked due to which the operating costs may increase.”

“We marginally revise our revenue and EPS estimate for FY13 from Rs 221.31 bn and Rs 2.9 to Rs 222.13 bn and Rs 3.2 respectively. Similarly we marginally revise our revenue and EPS estimate for FY14 from Rs 234.04 bn and Rs 3 to Rs 235.86 bn and Rs 3.7. We value Idea Cellular using discounted cash flow approach to arrive at intrinsic value of Rs 156 per share. After reducing the present value of one time excess spectrum charges and license renewal payment, we arrive at our new one year target price for Idea Cellular at Rs 108,” says FinQuest Securities research report. 

Public holding more than 90% in Indian cos

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