Buy Idea Cellular; target of Rs 116: Axis Direct

Idea’s Q1 consolidated revenue grew 7.9% YoY (QoQ not comparable owing to Ind-AS). Voice volumes dropped an unprecedented (for Q1) 1% QoQ, while pricing was up 3% QoQ. Data volumes grew 13% QoQ (Bharti: 8% QoQ) driven by data subscriber growth of 9% QoQ and usage per subscriber growing by 4% QoQ. Accelerated network rollouts (>2x in past one year) ahead of revenue growth has led to network cost rising to 27.4% of revenue (Q1FY16: 25.6%). Consequently, EBITDA contracted 150 bps YoY to 32.4%. We expect Idea’s growth to be driven by subscriber addition-led volume growth in both voice and data. Given the low capacity utilization, we expect pricing to remain under pressure as incumbents look to grab share from peripheral operators and pre-empt new competition.

We value the stock at Rs 116 based on 6x FY18E EV/EBITDA for the wireless business, 11x FY18 for Indus Towers (Bharti Infratel: 10x FY18) and after factoring in spectrum / regulatory payouts (deferred payments and one-time outgo). The stock trades at 19.6x FY17E/20.2x FY18E EPS of Rs 5.0/Rs 4.8. Maintain BUY.