Reward for an Idea: Upgraded on rising volumes, data share

Subscriber gains, better realisations and operating leverage will help the company report strong growth ahead

The Idea stock has jumped nearly nine per cent over the last two trading sessions on strong fourth quarter results and earning upgrades for FY14. After the company posted a better-than-expected March quarter performance, aided by volume growth, lower costs and uptick in new services such as 3G, analysts have upgraded earnings estimate for the current financial year by 20-30 per cent.

Earnings estimates for FY14 are now pegged at Rs 5-6, an 80 per cent jump from the FY13 levels. While the stock has run up over the last one month, analysts say the price to earnings growth (PEG) ratio at 0.5 times for FY14 on the back of earnings upgrades and enterprise value (EV) / Ebitda (earnings before interest, tax, depreciation and amortisation) of just under seven times is reasonable.

Although most analysts agree that Idea’s execution is unmatched and this is reflected from the gains, both on the subscriber and revenue market share parameters, the recent run-up (and regulatory risk) leaves limited upside in the near term. The stock, which has significantly outperformed its larger peer Bharti Airtel in the past six months, on Monday scaled to its five-year closing high of Rs 126.10.

In this backdrop, investors can consider it on dips from a longer term horizon for gains on the back of easing competition (the last six months saw the number of operators fall), operating leverage and data uptick which will help the company improve volumes and margins. The key risk would arise when Reliance Industries-owned Reliance Jio launches its 4G operations (data and voice), which is expected towards end-2013. Any disruptive pricing (as seen earlier in the voice segment) could hurt the incumbent operators, including Idea.

Rising volumes
Among the key takeaways in the March quarter has been the 8.5 per cent traffic growth driven by lower multi-SIM card use (customers shifting from weaker operators to Idea), expanded subscriber base and higher rural usage (55 per cent of Idea’s subscriber base). Churn for the company reduced from 10 per cent in the September 2012 quarter to 4.3 per cent in the March 2013 quarter, and its subscriber base increased by 6.7 per cent sequentially to 121.6 million.

The company has been a key beneficiary of the withdrawal of smaller operators who could not retain spectrum in the November 2012 auctions. According to Citi Research analysts, Idea will benefit from the easing of competitive intensity in the sector. Its high operating leverage means that every one paisa increase in revenue per minute could lead to a seven per cent increase in its Ebitda. While consolidation in the sector is likely to yield more gains, Kotak analysts say (even without it) the company’s ability to gain market share on a sustained basis will help it log volume growth of 11.6 per cent over the next two years.

Data, margin gains
The company added a million 3G subscribers in the March quarter, taking the total base to five million. While data volumes increased 19 per cent quarter-on-quarter (there have been no price cuts), the company also managed to increase data realisations by 9.4 per cent to 33.9 paise per MB (megabit). Sharekhan analysts believe that data would be the key revenue growth driver over the next two years.

Kotak analysts estimate data revenues as a percentage of wireless revenues to more than double to 13.4 per cent in FY15, compared to 5.5 per cent in FY13. Ebitda margins increased from 26.5 per cent to 28.9 per cent, largely due to a sharp reduction in network operating expenses and an increase in the contribution of data.

Outlook
Despite the positives, the company’s blended average revenue per minute (ARPM) at 41.2 paise was flat, largely due to a decline in voice revenue per minute or RPM (down 0.5 per cent). Voice RPMs are likely to stabilise on the back of lower discounts during the March quarter. Analysts at Sharekhan say ARPMs are likely to see a gradual uptick on the back of increase in data contribution and selective tariff hikes, going forward.

The Idea management, however, is cautious on the voice revenue metric given the fact that it continues to be aggressive in its newer circles, which contribute about 12.5 per cent of revenues. Going forward, revenue growth is likely to come from volumes, while lower subscription cost on the back of reducing competitive intensity and falling churns may help improve margins.