Hold Idea Cellular; target of Rs 100: ICICI Direct

Idea clamped down on promotional offers resulting in an improvement in voice realised rate by 3.1% QoQ from 33.3 paisa in Q4FY16 to 34.3 paisa in Q1FY17. However, such a strategy has been weighing down on voice traffic, which fell 1.14% QoQ to 199.3 billion minutes vs. our expectations of 203.0 billion minutes leading to a subdued voice revenue growth of 0.6% QoQ to Rs 6715.8 crore. Idea fared better than Airtel in the data segment posting 11.0% QoQ growth in data subscribers to 49.1 million users coupled with 13.0% QoQ growth in overall data volume to 93 billion MB. However, the data realisation fall was steeper at 8.0% QoQ to 21.3 paisa, hence diluting data revenue growth to 3.0% QoQ at Rs 1926.8 crore. EBITDA of Rs 3074.2 crore as per Ind-AS, is not comparable to our estimates. The comparable EBITDA inclusive of Indus was at Rs 3359.6 crore below our expectations of Rs 3569.2 crore owing to higher-than-expected network operating expenditure, which increased 24.5% QoQ and data related deferment. Comparable margins came in at 35.4%, lower than our expectations of 37.2%PAT came in at Rs 220.4 crore vs. expectation of Rs 430.0 crore owing to misses on the EBITDA front as explained above.

We have revised our estimates for Idea factoring in Ind-AS changes, higher network costs and higher tax outgo. Though Idea has indicated at exercising circle wise discretion in upcoming auctions and not blocking excess capital in anticipation of future demand, we believe it still has 3G/4G footprint missing in certain circles and its outgo will be relatively higher. In addition, declining tariffs and slowing tempo of growth in overall data and voice volumes is concerning. We remain wary of the disruptions with the impending launch of Jio and downgrade the stock to HOLD with a revised target price of Rs 100 on a DCF based methodology.For all recommendations, click hereDisclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.