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MOSL: IDEA CELLULAR (Buy)-Awaiting light at the end of the tunnel

Idea Cellular: Awaiting light at the end of the tunnel

(IDEA IN, Mkt Cap USD5.2b, CMP INR94, TP INR110, 17% Upside, Buy)

 

• IUC cut, ARPU downtrading hurt earnings: IDEA’s revenue declined 13% QoQ (-25% YoY) to INR65.1b (2% miss), while EBITDA fell 19% QoQ to INR12.2b. The impact on revenue/EBITDA on account of IUC rate cut was 11%/15%; the balance was due to ARPU downtrading. However, lower cost (-11% QoQ) helped restrict the impact on margins (-130bp QoQ to 18.8%). Net loss widened to INR12.8b (est. of INR13.9b) from INR11.1b in the previous quarter.
• ARPU continues its free-fall: Bucking the trend of 2QFY18, gross subscribers grew 3% QoQ to 188.5m. Despite this, intense competition in the sector led to blended ARPU decline of 14% QoQ (11% impact on IUC). Voice/data ARPU dropped 5%/10% QoQ to INR85/INR95 due to a decline of 24%/26% in RPM/ARMB, offsetting traffic growth of 11%/30% QoQ.
• Synergies from merger – only savior: As pressure in the sector continues to mount (with recent APRU cut by RJio), synergies from the merger – which is expected to be complete by June’18 – appear to be the only savior for IDEA. We cut IDEA’s revenue/EBITDA by 6-8% for FY19-20E. However, note that the merged entity reporting may change our overall financial estimates. The combined entity’s revenue/EBITDA is expected to grow 0%/43% in FY19/20, building in a 30% EBITDA margin in FY20 on the back of INR2.1b opex synergies and better cot optimization. This is still lower than Bharti’s 33% EBITDA margin with a similar revenue market share.