Stock Market Result Update on Idea Cellular for 2QFY2012

Stock Market Result Update on Idea Cellular for 2QFY2012 with an Neutral recommendation 

For 2QFY2012, Idea Cellular (Idea) reported modest revenue growth, which was in-line with our expectation; however, the company disappointed on the bottom-line front. The major highlight of the result was inching up of average revenue per minute (ARPM) by 4.1% and VAS share in mobility revenue increasing to 13.2% from 12.1% in 1QFY2012. We maintain our Neutral view on the stock.

Quarterly highlights: For 2QFY2012, Idea reported consolidated revenue of `4,620cr, up 2.2% qoq, on the back of 4.1% qoq growth in ARPM to `0.427/min and subscriber growth of 5.4% qoq with end-of-period (EoP) subscriber base standing at 100.2mn. The effect of these positive factors was partially overshadowed by the negative impact from the decline in minutes of usage (MOU) by 6.9% qoq to 364min from 391min in 1QFY2012. EBITDA margin decreased by 95bp qoq to 25.7% due to higher employee costs and roaming and access charges. However, EBITDA per minute (EPM) stood flat qoq at `0.11. PAT came in at `106cr, down 40.3% qoq, due to higher interest costs of `294cr and higher depreciation and amortization expenses of `737cr on account of 3G-related expenses.

Outlook and valuation: Idea posted growth in ARPM again for the second consecutive quarter on account of increased VAS share in mobility revenue and tariff hikes undertaken from August 2011. Management indicated that the full effect of hiking tariff rates would flow in from 3QFY2012, which will further aid the company’s ARPM. This will, in turn, scale up ARPM, which we expect will post an 8.3% CAGR over FY2011-13E. With increasing ARPM, higher VAS share as a percentage of total revenue and rising number of subscribers for 3G services, we expect revenue to witness a 22.8% CAGR over FY2011-13E. We value the stock at EV/EBITDA of 6.5x FY2013E i.e., at 10% discount to Bharti Airtel‘s EV/EBITDA multiple, which gives us a fair value of `93. Hence, at current levels, we maintain our Neutral rating on the stock.