Stock Market Update on Idea Cellular for 4QFY2011 with a Neutral Recommendation

Idea Cellular (Idea) reported its 4QFY2011 results which outperformed street as well as our expectations on all fronts. The revenue growth was majorly led by strong subscriber addition of 7.7mn in this quarter, however, minor erosion in KPIs swept off slight revenue gains. We maintain Neutral view on the stock.

Decent revenue growth: For 4QFY2011, Idea reported consolidated revenues of `4,235cr, up 7.1% qoq. This was on the back of higher subscriber growth of 9.4% qoq to 89.5mn which overshadowed the negative impact of decline in MOU and ARPM to 397mn (1.0% qoq decline) and 0.41`/min (2.9% qoq decline) from 401min and 0.42`/min in 3QFY2011, respectively.

EBITDA margin enhance: Despite slight erosion in the KPIs of the mobility business in 4QFY2011, EPM grew by 4.3% qoq to 0.11`/min. This was partially due to a one-time cost reversal in NOE of `38cr, which aided overall EBITDA of Idea and thus contributed to improvement in EPM. EBITDA margin of ESA and NSA increased by 120bp and 439bp qoq, respectively, which led to 142bp qoq improvement in consolidated EBITDA margin to 25.4%. Adjusting for reversal in NOE, consolidated EBITDA margin grew by 52bp qoq to 24.5%.

Outlook and valuation: Idea has recorded robust subscriber net additions over the past few months with monthly additions of ~2.5mn. However, going forward we expect the net additions to cool off of for the entire telecom universe and expect the subscriber base of Idea to grow at a CAGR of 16.2% over
FY2011-13E. We expect ARPM’s to remain stable as we expect the company’s 3G subscriber base to expand and contribute to data services. At the CMP, the stock is trading at EV/EBITDA of 6.4x FY2013. 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 target price of `76. Hence at current levels, we maintain Neutral rating on the stock.