Idea Cellular (IDECEL) 178

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1 Result Update Rating matrix Rating : Buy Target : 215 Target Period : 12 months Potential Upside : 24% What s changed? Target Unchanged EPS FY16E Changed from 9.3 to 10.1 EPS FY17E Changed from 6.1 to 7.7 Rating Unchanged Quarterly performance Q1FY16E Q1FY15 YoY (%) Q4FY15 QoQ (%) Revenue 8, , , EBITDA 3, , , EBITDA (%) bps bps PAT Key financials Crore FY14 FY15 FY16E FY17E Net Sales 26,519 31,571 36,557 40,933 EBITDA 8,334 10,812 13,626 15,781 PAT 1,968 3,193 3,625 2,758 EPS (in ) Valuation summary FY14 FY15 FY16E FY17E P/E Target P/E EV / EBITDA P/BV RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) 64,373.3 Total Debt (FY15) ( Crore) 26,859.1 Cash (FY15) ( Crore) 1,553.7 EV ( Crore) 89, week H/L 203 / 134 Equity capital 3,597.8 Face value 10.0 Price performance 1M 3M 6M 12M Bharti Airtel RCOM Idea Research Analysts Karan Mittal karan.mittal@icicisecurities.com Bhupendra Tiwary Bhupendra.tiwary@icicisecurities.com Sneha Agarwal sneha.agarwal@icicisecurities.com Volume growth in voice remains robust July 23, 2015 Idea Cellular (IDECEL) 178 Idea reported better-than expected voice revenues of crore with traction in voice minutes at billion vs. expectations of billion minutes. Voice ARPMs declined 3.5% QoQ to 32.7 paisa owing to the full impact of the Trai related interconnect charges reduction. Data revenues exhibited 9.3% QoQ growth to crore, forming 17.7% of mobility revenues due to robust 15.0% QoQ increase in data consumption per subscriber to 589 MB in the quarter. Data ARMB declined 4.3% QoQ to 24.6 paisa EBITDA came in at crore, higher than our expectation of crore, up 5.3% QoQ (up 28.6% YoY) higher owing to the beat at the revenue level leading to an EBITDA margin of 36.7% PAT came in at crore vs. expectation of 906 crore. Higher EBITDA was offset by higher interest costs to the tune of crore owing to the interest charge for upfront payment for the March 2015 auction and for 900 MHz spectrum in Delhi Volume growth in voice remains intact; allaying cannibalisation fears Idea has been displaying robust voice volume in the past two quarters and has continued the trend with 5.8%QoQ voice volume growth to billion minutes in the quarter. Robustness in voice minutes is heartening as it provides some respite to the cannibalisation fears of voice minutes towards VoIP. Going ahead, we have factored in voice volume growth of 12.6% CAGR in FY15-17E to 867 billion minutes. The decline in voice ARPM to 32.7 paisa from 33.8 paisa stemmed primarily from the reduction in interconnect & roaming charges and increase in the service tax. The net impact of these factors led to the revenue impact of ~ 317 crore. Going ahead, we expect the voice ARPM to decline at 3.8% CAGR in FY15-17E to 33.0 paisa. Voice revenues are expected to grow at 8.3% CAGR in FY15-17E to crore. Data contribution to overall revenues to reach 21.6% by FY17E Data revenues have grown 3.7x from FY13 to crore in FY15 growing from 5.6% to 14.6% of total revenues in the same period. Though the data realisation per MB is seeing a declining trend, we expect data volumes to be stellar at 51.5% CAGR in FY15-17E to billion MB. As a result, data revenues are expected to grow at 38.6% CAGR in FY15-17E to crore, forming 21.6% of mobility revenue. Idea to invest in 4G roll-out, revises capex guidance Idea has successfully secured spectrum in all nine service areas due for expiry in December 2015, April 2016, ensuring continuity of existing business for its million subscribers (68% of the customer base). It has secured itself from the brunt of spectrum payouts till 2035 (2032 for seven licenses). Idea has also initiated multiple steps towards introduction of 4G LTE services on 1800 MHz band in 10 service areas in a phased manner from 2016 onwards. It will also evaluate a range of digital services and apps in areas including entertainment, communications, etc. to complement its 4G entry. It has, thus, revised its capex guidance to crore from crore in light of the 4G roll-out. Comes out safe from auctions, robust subscriber additions, maintain BUY Idea continues to post robust voice and data volume growth. We expect revenue and EBITDA to post 13.9% and 20.8% CAGR (FY15-17E). The accounting for interest & depreciation related to recent spectrum purchases has dented PAT. It will, however, have a lower cash flow impact. We maintain BUY recommendation with a target price of 215. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q1FY16E Q1FY16E Q1FY15 Q4FY15 YoY (%) QoQ (%) Comments Revenue 8, , , , Revenues came in higher-than-expected owing to strong traction seen in voice minutes to billion minutes Other Income NA Employee Expenses Marketing Expenses Network operating expenditure 1, , , , License and WPC Charges 1, Roaming & Access Charges 1, , , , EBITDA 3, , , , Higher revenues flowed into EBITDA EBITDA Margin (%) bps 31 bps Depreciation 1, , , , Interest Includes interest charge for upfront payment for March 2015 auction and for Delhi 900 MHz spectrum Total Tax PAT Higher interest costs offset the impact of higher EBITDA while PAT was also aided by higher other income Key Metrics Subscribers (Million) ARPU (Rs) MoU (Rs) The traction from urban markets and improvement in quality of subscriber addition led to higher-than-expected MoUs ARPM (Rs) Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Revenue 35, , , , There has been a continued robustness in voice volume, which has led us to slightly revise our total minutes traffic estimates leading to higher revenues EBITDA 12, , , , EBITDA Margin (%) bps bps PAT 3, , , , EPS ( ) Assumptions Current Earlier Comments FY14 FY15 FY16E FY17E FY16E FY17E Wireless Subscribers (Mn) Blended ARPU The ARPU estimates have been revised on account of string traction seen in both voice and data offering Total Minutes The decline in ARPM due to competitive pressures and change in interconnection charges would help in boosting voice volumes MoU per subscriber The voice volumes continue to stay healthy, hence, leading to an increase in MoUs ARPM (Paisa) ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Robust subscriber additions Idea has exhibited higher than industry subscriber and revenue growth in the past few years. Subscribers have grown at 33.5% CAGR (FY08-14) while revenue has grown at 25.7% CAGR in the same period. Also, its revenue market share has increased from 9.6% in FY08 to 17.5% currently. Idea has been able to garner a high share in net adds with a net adds market share of 27.2%. Going ahead, we expect subscriber growth to remain higher than industry at 8.5% CAGR over FY15-17E to reach million subscribers. Exhibit 1: Subscriber details trends Million FY13 FY14 FY15 FY16E FY17E Subscribers Robustness in voice volume heartening Idea has been displaying robust voice volume in the past two quarters and continued the trend with 5.8% QoQ voice volume growth to billion minutes in the quarter. Robustness in voice minutes is heartening as it provides some respite to cannibalisation fears of voice minutes towards VoIP. Going ahead, we have factored in a voice volume growth of 12.6% CAGR over FY15-17E to 867 billion minutes. The decline in the voice ARPM to 32.7 paisa from 33.8 paisa stemmed primarily from the reduction in interconnect & roaming charges and increase in the service tax. The net impact of these factors led to the revenue impact of ~ 317 crore. Going ahead, we expect the voice ARPM to decline at a 3.8% CAGR in FY15-17E to 33.0 paisa. Voice revenues are expected to grow at 8.3% CAGR in FY15-17E to crore. Exhibit 2: ARPM trends / Minutes FY13 FY14 FY15 FY16E FY17E MoU ARPU ARPM ICICI Securities Ltd Retail Equity Research Page 3

4 Data to grow at 50.8% CAGR in FY15-16E Data revenues have almost doubled in the past year to crore in FY15 from crore in FY13. With the increased penetration of smart phones, data subscribers for Idea rose from 2.6 crore in FY13 forming 21.6% of the total subscribers to 3.3 crore in FY15. We expect it to rise to 5.5 crore subscribers, forming 29.5% of total subscribers. The data usage per subscriber has also risen from 148 MB in FY13 to 514 MB in FY15, hence reaching 172 billion MB data traffic by FY15. Idea, in the recently held spectrum auctions invested about crore to win back its expiring spectrum and also to augment its spectrum portfolio. Realisation per MB has been on a downtrend, declining from 33 paisa in FY13 to 24.5 paisa in Q4FY15. It is believed that realisations have little scope to increase as it may hit data volumes. Though telcos have increased prices of certain 2G plans, we believe it will be a short-term phenomenon. We expect ARMB to decline to 21.0 paisa by FY17. However, the data volume is expected to reach 396 billion MB by FY17 from billion MB in FY14. Exhibit 3: Data subscribers and total data traffic ,725 2,888 3,960 FY14 FY15 FY16E FY17E Data Traffic (Bn MB) Data Subscribers (Mn) - RHS ICICI Securities Ltd Retail Equity Research Page 4

5 Valuation Idea continues to post robust voice & data volume growth. We expect revenue & EBITDA to post 13.9% and 20.8% CAGR (in FY15-17E). The accounting for interest & depreciation related to recent spectrum purchases has dented PAT. It will, however, have a minimum cash flow impact. We maintain BUY rating with a target price of 215. Exhibit 4: DCF Assumptions Particulars Amount WACC 10.9% Revenue CAGR over FY16E - FY22E 10.2% PV of Cash Flow Till Terminal Year 21,273.1 Terminal Growth 4.0% Present Value of terminal cash flow 107,758.1 PV of firm 129,031.2 Less: Net Debt 51,685.4 Total present value of the Equity (excluding current cash) 77,345.8 Number of Equity Shares outstanding DCF - Target price ( ) Exhibit 5: Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY14 26, FY15 31, FY16E 36, FY17E 40, ICICI Securities Ltd Retail Equity Research Page 5

6 Company snapshot Target Price Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Apr-09 Nov-09 Apr-10 Feb-12 Nov-12 Jun-13 Event Idea becomes a pan- India operator through service launches in Odisha, Tamil Nadu, J&K, Kolkata, West Bengal, Assam and North East Reliance Communications on November 27 introduces one paise per SMS for both GSM and CDMA customers, triggering a war of tariffs on data services from Acquires 3G license in 11 circles, which contributed about 80% of Idea's revenue at that time, for 5769 crore Supreme Court cancels licenses, which include Idea's licenses in seven circles. It gives way to lower competition in the industry Spectrum auction post license cancellation takes place. These auctions reduce several players to regional operators. Idea acquires licenses in the cancelled circles Pricing power returns to operators. ARPMs start showing upward momentum. Idea increases its ARPM from 41 paisa at the end of FY13 to 44.9 paisa by Q3FY14 Feb-14 Spectrum auctions held in the 900 and1800 MHz band while Idea purchases spectrum in 11 circles at an outlay of crore Jun-14 Idea Cellular succesfully completes its QIP of 3000 crore and allots million fresh equity shares at an issue price of 134 per equity share, including 124 as a premium on per share Jul-14 Idea raises 750 crore by making preferential allotment to Axiata Group. Axiata was alloted 51.8 crore equity shares at per equity share Mar-15 Spectrum auctions held in the 800, 900, 1800 and 2100 Mhz band. Idea participates in auctions and wins back all its expiring spectrum with a total of 79.4 MHz won. The total payout for Idea is crore and the immediate payout is 7790 crore Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m)n Change (m) 1 Aditya Birla Group 30-Jun , Axiata Group Bhd 30-Jun Providence Equity Partners LLC 30-Jun First State Investment Management (UK) Limited 30-Jun Capital World Investors 30-Jun The Vanguard Group, Inc. 30-Jun ICICI Prudential Life Insurance Company Ltd. 30-Jun BNP Paribas Investment Partners Asia Ltd. 30-Jun BlackRock Institutional Trust Company, N.A. 30-Jun Schroder Investment Management Ltd. (SIM) 30-Apr Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares BNP Paribas Investment Partners Asia Ltd m 30.00m HDFC Asset Management Co., Ltd m m Norges Bank Investment Management (NBIM) 30.63m 12.55m M & G Investment Management Ltd m -9.76m ICICI Prudential Life Insurance Company Ltd m 5.91m Franklin Advisers, Inc m -8.71m Franklin Templeton Asset Management (India) Pvt. Ltd m 5.50m Driehaus Capital Management, LLC m -8.03m L&T Investment Management Limited 10.56m 3.89m American Century Investment Management, Inc m -6.54m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 6

7 Financial summary Profit and loss statement Crore (Year-end March) FY14 FY15 FY16E FY17E Total operating Income Growth (%) Employee Expenses 1, , , ,032.7 Roaming & Access Charges 4, , , ,419.0 Network operating expenditure 6, , , ,316.9 License and WPC Charges 2, , , ,584.5 SG&A Expenses 2, , , ,685.6 Other Costs ,113.7 Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income Non Operating Expenses PBT MI/ Profit from associates Total Tax PAT Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY14 FY15 FY16E FY17E Profit after Tax 1, , , ,757.8 Add: Depreciation 4, , , ,255.4 Add: Interest paid , , ,427.0 (Inc)/dec in Current Assets (1,672.7) (543.1) (1,220.9) Inc/(dec) in CL and Provisions , ,523.3 Others CF from operating activities 8, , , ,696.1 (Inc)/dec in Investments , (Inc)/dec in Fixed Assets -15, , , ,500.0 Others CF from investing activities -14, , , ,000.0 Issue/(Buy back) of Equity Inc/(dec) in loan funds , , ,000.0 Dividend paid & dividend tax Interest Paid , , ,427.0 Others 7, , , ,000.0 CF from financing activities 5, , , ,595.4 Net Cash flow , , ,100.7 Opening Cash , Closing Cash , ,070.7 Balance sheet Crore (Year-end March) FY14 FY15 FY16E FY17E Liabilities Equity Capital 3, , , ,597.8 Reserve and Surplus 13, , , ,168.7 Others Total Shareholders funds 16, , , ,768.4 Total Debt 18, , , ,239.1 Deferred Tax Liability 1, , , ,901.5 Others Total Liabilities 38, , , ,872.3 Assets Gross Block 51, , , ,331.1 Less: Acc Depreciation 21, , , ,792.5 Net Block 29, , , ,538.5 Capital WIP 11, , , ,277.5 Total Fixed Assets 41, , , ,816.0 Investments , , ,532.9 Inventory Debtors , ,847.7 Loans and Advances 4, , , ,356.8 Other Current Assets Cash , ,070.7 Total Current Assets 5, , , ,495.0 Creditors 7, , , ,107.2 Provisions , Total Current Liabilities 8, , , ,017.3 Net Current Assets -3, , ,477.7 Other Non Current Assets Application of Funds 38, , , , Key ratios (Year-end March) FY14 FY15 FY16E FY17E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios EBITDA Margin (%) EBIT Margin (%) PAT Margin (%) Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 7

8 ICICIdirect.com coverage universe (Telecom) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Bharti Airtel (BHATE) Buy 174, Bharti Infratel Buy 86, Idea Cellular (IDECEL) Buy 64, Tata Comm. (VIDSAN) Buy 13, *FY15 numbers are projected for Tata Communications ICICI Securities Ltd Retail Equity Research Page 8

9 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 9

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