CMP Rs77, Target Rs106, Upside 38.2%
Idea’s FY12 annual report lists out several achievements at a time of ‘unprecedented stress and uncertainty’ viz. 1) rise in EBIDTA margin by ~170bps, a first since listing 2) CY11 revenue growth 900bps ahead of industry rate 3) 107bps rise in RMS share in CY11. FY12 revenues increased 26% yoy driven by 25% jump in traffic while EBIDTA grew at a faster 35%, though higher interest and amortization costs associated with 3G led to a 19.6% decline in reported PAT. Non-voice revenues rose 220bps in FY11 to 14.3% and focus is on building a ‘data factory’ in 3G space. In our view, more than the operating state, the biggest overhang is the uncertainty wrt regulatory issues like cancellation of 2G licenses, steep reserve price for 1800MHz auction and 900MHz refarming. However, valuations are attractive enough to outweigh regulatory risks at current juncture: retain BUY for 9-mth tgt of Rs106.
Some +ves amidst ‘unprecedented stress & uncertainty’
Idea managed an encouraging FY12 show with rise in EBIDTA margins, industry beating revenue growth and higher revenue market share. The performance comes amidst heightened regulatory uncertainty in the form of license cancellations, steep 1800MHz reserve pricing and 900MHz refarming. Revenues grew 26% yoy driven by 25% increase in traffic and Q4 rev/min higher by 3.9% over Q4 FY11 despite giving up some of its 9 month rise in Q4.
EBIDTA gains eaten away by 3G related costs
An impressive 35% jump in EBIDTA did not translate into higher profit due to increased interest cost and amortization of fully operational 3G spectrum. Operating CF also declined due to rise in working capital (driven by higher loans and advances and lower payables). Return ratios posted a divergent performance with RoCE expanding ~190bps yoy on the back of improved EBIT margin.
Attractive valuation outweigh regulatory risks: retain BUY
TRAI’s recos on 1800MHz reserve pricing and 900MHz refarming proposals pose risks to Idea’s balance sheet. On a positive note, we expect a ~64% PAT cagr over FY12-14 driven by higher margins. Valuations too appear supportive at 5x FY14E EV/EBIDTA and the stock trading at lower end of its historic 1-yr fwd EV/EBIDTA range. We retain our BUY rating with 9-mth tgt price of Rs106.