Idea: Market share gains to offer upside

While regulatory issues will weigh, consistent market share gains are key if the stock is to move up from current levels

Idea Cellular Ltd, which has been at the receiving end of multiple regulatory issues, recovered some of its eight per cent loss over the last week after a favourable judgment in the third-generation (3G) roaming case. The stock closed four per cent up on Monday, after the Supreme Court allowed the company (alongwith Bharti Airtel Ltd and Vodafone India Ltd) to continue its 3G offerings outside its licensed zones till Thursday, when it is expected to give its judgment.

The stock closed 3.04 per cent higher today on BSE at Rs 108.60, while the benchmark Sensex gained 1.03 per cent to 18,414.45. Analysts at Motilal Oswal Securities, in a recent report on the company, said the Rs 3,900-crore tax demand on Idea, along with a recent department of telecommunications order to cease 3G roaming and levy penalties on GSM incumbents, do not augur well for resolution of regulatory uncertainties.

However, unlike Airtel or Reliance Communications (RCom), which are struggling with tougher regulatory and debt-related issues, respectively, Idea, with its India-only focus, has had lesser problems to overcome and, thus, commanded a premium. JPMorgan analysts say the company continues to be the strongest operational play in the sector, with continued market share gains and a relatively healthy balance sheet (net debt to Ebitda at 2.2 times). Ebitda stands for earnings before interest, taxes, depreciation and amortisation. By way of comparison, RCom's number for the same metric is about 5.6 times.

 

The premium gap could, however, close if regulatory issues are not resolved quickly and could become an overhang on the Idea stock. In addition to the regulatory issues, the key is whether the company can sustain market share gains. If it is able to sustain the gains, one can expect the stock to deliver good returns. For now, after factoring in regulatory costs to the tune of Rs 40-50 a share, analysts have pegged target prices ranging between Rs 115 and Rs 125. About 40 per cent of analysts have a ‘buy’ call, according to Bloomberg recommending the stock. At Rs 108.6, the stock trades at 25 times its FY14 earnings estimates.  

Can gains sustain?
While there is little clarity on the regulatory front, the unfolding of the competitive scenario is key to growth and profitability of the sector, as well as Idea. Most investors will be looking at sustainability of pricing power for incumbent operators. Standard Chartered analysts Rahul Singh and Saurav Anand have upgraded Idea to 'outperform', while maintaining estimates after the recent price correction and potential lower regulatory cost, given auction failures. Moreover, Idea stands to gain the most, especially if call rates go up.

“Being a pure play, Idea is more leveraged to RPM (revenue per minute) increase. Every one paisa increase in RPM yields five per cent in Ebitda and 14 per cent in FY14 earnings estimates,” say Singh and Anand. In addition to RPM increase, what will aid the stock is market share gains, especially in the circles vacated by smaller players. On this front, it will be interesting to see how the equation for incumbents pan out when Reliance Jio starts operations.

Healthy March quarter
With pricing power coming back to incumbents, operational performance is expected to show an improvement in the March quarter. Revenues are expected to grow 6.7 per cent, driven by five per cent growth in volumes and 1.8 per cent growth in RPM, according to IIFL Institutional analysts led by G V Giri. Most analysts peg six-seven per cent sequential growth in Ebitda for Idea, achieved by a combination of slight increase in revenue per minute, healthy minutes growth and margin expansion. All this flowing through will enhance the bottomline by 35 per cent quarter-on-quarter, to Rs 308 crore.