Hold Idea Cellular; target of Rs 63: ICICI Direct

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ICICI Direct's research report on Idea Cellular

Consolidated revenues came in lower at Rs 6137.3 crore (down 5.7% QoQ) vs. our estimates of Rs 6212.4 crore, impacted by international IUC cuts (impact of Rs 52 crore) and price competition. The miss was on account of higher than expected impact of price erosion owing to competition. The resultant ARPU was at Rs 105 (down 7.9%QoQ) vs. our expectations of Rs 107. The voice volume usage continued to be buoyed by free outgoing offers under the bundled package, resulting in 16.9% QOQ growth in voice volumes to 330.3 billion minutes. The overall Data consumption per sub continued to grow handsomely at 6.0 GB, 28% QoQ, on account bundled offerings. EBITDA came in at Rs 1447.1 crore, up 18.3% QoQ vs our expectations of Rs 960.1 crore, owing to one-off write backs of costs of Rs 440 crore across network opex, employee expense and license and spectrum charges. The consequent reported margins came in at 23.6% vs expectations of 15.5%. Adjusted margins were at 16.4%. Reported net loss came in at Rs 962 crore (vs. expectation of a loss of Rs 1465 crore). The better than anticipated EBITDA and higher other income led to lower than anticipated losses.

Outlook

We maintain that near term tough times would remain considering recent price cuts by Jio’s and its effort to eat into the 2G base of incumbents. Sooner than expected merger with Vodafone (by H1CY18) and its effort of integrating the merger through active infra sharing and 4G ICR, however, does bode well for the company under the current hyper competitive scenario. We, however, highlight that with more than 75% of the combined entity subscriber base being 2G and Jio’s aggressive JioPhone push indicate that pain is far from over on competition front. We would, therefore, change our stance only when we witness the synergy benefit coming into play amid the competitive scenario. We have lowered our ARPU and margins and estimates. We maintain HOLD and lower our target price to Rs 63 (vs. 85 earlier) on a DCF based methodology.

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