Sell Idea Cellular; target of Rs 79: Nirmal Bang

Nirmal Bang is bearish on Idea Cellular and has recommended sell rating on the stock with a target of Rs 79 in its October 23, 2012 research report.

• Active subscriber proportion is the highest in the industry, at over 94%.
• Idea has total active subscriber market share of 15.5%, well ahead of its subscriber market share of less than 13.0%, thereby reflecting the quality of its subscribers and the focus on revenue market share (RMS).
• The company has RMS of 14.9%, with incremental RMS at nearly 23%.
• In 2QFY13, the seasonality impact was exacerbated in the wake of a higher proportion of rural subscribers and also due to a delayed monsoon, adversely impacting rural incomes.
• Apart from this, the active subscriber addition in 2QFY13 was just 0.3mn (3.1mn in 1QFY13), which, along with the seasonality, were key reasons for the 4% QoQ decline in minutes of usage (MoU), thereby leading to a sequential decline in revenue for the first time.
• Data revenue growth was healthy, at nearly 16% QoQ, and was the key reason for revenue/minute (RPM) not declining, despite the fall in overall revenue, even as voice operating metrics were disappointing.
• Idea had an active 3G subscriber base of 3.7mn (3.1mn in 1QFY13), with incremental average revenue per user (ARPU) at Rs87 for 3G data services (a marginal decline from Rs88 in 1QFY13).
• Going forward, Idea believes data adoption in the Indian market will be more a function of lower device prices rather than just data tariffs; on this front, the company has launched its fourth 3G handset in the price range of Rs5,000-7,500.
• As regards margin expansion in 2QFY13, Idea cited the reasons as reduction in subscriber acquisition and servicing (SAS) costs (due to a fall in susbcriber addition), rationalisation in pay-outs to sales channel, reduction in some discretionary costs and a fall in advertising and business promotion (ABP) expenses; the cut-back was in view of the fact that the September quarter is seasonally weak and the company was thus able to keep costs in check.
• Going forward, in the wake of 3QFY13 being a seasonally strong quarter, Idea expects ABP spending to return to higher levels.
• Idea had a forex gain of Rs180mn in 2QFY13 (Rs245mn loss in 1QFY13).
• The company maintained its capex guidance of Rs35bn for FY13, excluding spectrum-related payments.
• Idea is gearing up to participate in the upcoming spectrum auctions. It is of the view that in the wake of high spectrum base prices and some escalation in the final prices at the auctions, tariffs will rise for consumers.
• Idea believes there is still scope for growth in the Indian voice market, with 250mn-300mn new subscribers still to come on to telecom networks.

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