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IDEA Cellular's Q3FY18 results (Underperformer) - Expectedly weak performance

Q3FY18 result highlights

• Weak performance: Revenues de-grew 12.8% qoq to Rs65bn (IDFCe Rs66bn) with 15% sequential de-growth in voice revenues and 5% qoq decline in data revenues. EBITDA margins eroded 132bp qoq to 18.8% driving 18.5% qoq and 43.5% yoy decrease in EBITDA (Rs12.2bn vs IDFCe Rs12.5bn). Net loss at Rs12.8 bn was slightly ahead of our estimate of -Rs12.7bn.
• Sub addition metrics better in Q3: In Q3, data subscribers increased by 4.4m to 42.6m even as data ARPU decreased 9.5% qoq to Rs95 (Q2FY18 Rs105). High speed data subscriber addition was at 5.1mn qoq vs. 3.2mn adds in Q2. Overall churn rates also reduced from 6.3% to 4.8% on a sequential basis.
• Capex guidance raised: Idea’s capex for the quarter was at Rs17.5bn and the company raised it full year capex guidance to Rs70bn from Rs60bn earlier. The high speed data population coverage has expanded to 52.4% (46.9% in Q2), but still trails competitors. There is some improvement in subscriber metrics, and would need to see sustainability as the Jio launches 4G feature phones.
• Management commentary: Management highlighted that Idea-Vodafone merger is in the final leg and expect to close in 1HCY18. Idea continues to push bundling (20% currently) in the sub base and focus of subscriber acquisition is on subs with ARPU >Rs 25.  International termination rate cut will have a negative Revenue and EBITDA impact of Rs650/Rs400mn in Q4FY18.
• Impact on financials: FY18E/FY19E EBITDA cut by 4.7%/4.8%. FY20E EBITDA remains unchanged.

Valuations & view

Idea reported an expectedly weak quarter with value erosion accentuated by IUC cut impact. It is good to see improvement in metrics such as subscriber adds and reduction in churn rates. However we remain concerned on the stretched balance sheet given capex needs to accelerate as data adoption becomes more mainstream and demand gets more volume centric. We believe that there are multiple fronts that Idea will have to fight on – synergies, capex, market share defence and balance sheet repair. Underperformer with unchanged target price of Rs90.