Maintain ‘hold’ on Idea Cellular with TP at Rs 78

Idea Cellular (Idea) reported weak revenue, but better profitability. We believe, Idea and Vodafone’s data capacity utilisation at 78% is high and they will have to accelerate capacity expansion. Idea’s balance sheet is stretched due to sharp fall in ARPU and market recovery is crucial for EBITDA recovery. Given high operating and financial leverage, we expect the stock to be volatile. Post healthy correction in stock price, any positive market or corporate development is likely to drive strong stock performance. However, due to uncertainties related to merger and timing of market recovery, we remain cautious. To factor slower recovery in ARPU, we cut FY19/FY20E revenue and EBITDA 3.5% and 7.5% each, respectively. Maintain ‘HOLD’ with revised TP of Rs 78.

Idea’s revenue declined 5.7% quarter-on-quarter as higher bundled pack adoption pushed down ARPU to Rs 105 from Rs 114. Reported EBITDA margin jumped 480 bps quarter-on-quarter to 23.6% as the company reversed excess provisions of Rs 4.4 billion related to earlier quarters. Adjusted EBITDA margin fell 240 bps quarter-on-quarter to 16.4% versus Street’s 15.8% estimate. The company did not see any acceleration in mobile broadband subscriber addition, which stood at 5 million versus 5.2 million in Q3FY18.

Idea and Vodafone will need to step-up capex as their data capacity utilisation is high at 78%. It is translating into relatively lower data speeds, according to various surveys, and is likely to weaken customer experience, impacting data subscriber addition. Due to stretched balance sheet, we expect external funding to become expensive and capex improvement will largely be driven by opex synergies. Although Idea will benefit from operating cost and capex synergies post merger with Vodafone, we remain concerned about its relatively low capex and possible loss of market share.

The company may lose key customers as users consolidate their usage in one sim to take advantage of unlimited offerings. At CMP, the stock is trading at 10.2x FY20E EV/EBITDA. We maintain ‘HOLD/SP’ with revised DCF-based TP of INR78.

Idea is India’s third largest telecom operator with a subscriber base of 190 million and revenue market share of 19%. Idea provides Pan India GSM mobile services and broadband services in all 22 service areas of India. Idea has started 4G services across 20 circles where it owns 4G spectrum following aggressive rollout in a phased manner since December 2016.