Idea Cellular Limited (Idea) reported full year result, in-line with our expectation, with a 50.6% y-o-y top line growth.
In Q4’09, Idea recorded a 7.5% q-o-q revenue growth as the Company increased its penetration in the existing 13 circles.
Besides, EBITDA margin expanded by 209 bps q-o-q, mainly due to a decline in marketing expenses in absence of any new launches during the quarter.
We believe the aggressive offers by new entrants and passing the benefit of reduction in termination charges to the subscribers are likely to lead to further reduction in the average realizations in coming quarters.
Subsequently, we expect a 10-11% p.a. drop in realization per minute (RPM) for FY09-11E.
Further, the minutes of usage (MOU) are likely to drop by ~8% p.a. due to inferior quality of new subscribers. Overall, we expect a 24% and 10% drop in ARPU in FY10 and FY11, respectively.
While, we are leaving our FY10E margin estimates broadly unchanged, FY11E estimates are decreased to incorporate the impact of decline in tariffs as the new players roll out their services.
Besides, the projected growth in number of rental cell sites would increase the network costs-to-sales by 3-4% taking into account the Indus agreement.
Moreover, the Indus JV’s share of profits is likely to be insufficient in the near term to compensate for the rentals on the demerged cell sites leading to contraction in the margins.
All said, we expect EBITDA margins to decline and remain ~24% in FY10 and FY11.
Currently, Idea’s stock is trading at a forward P/E of 28.8x FY10E and 22x FY11E. Our DCF-based valuation gives a fair value of Rs. 55, based on the assumptions of a 14.8% WACC and a 5% terminal growth rate.
We remain concerned about Idea’s operating performance over next 1-2 years considering the expected aggressive pricing by new players, addition of marginal subscribers and expected increase in network operating expenses leading to significant contraction in margins.
We downgrade our rating to a SELL.