Motilal Oswal neutral on Idea, downgrades FY10 PAT by 28%
Given the increased competition and recent termination charge cut, Motilal Oswal Securities has downgraded FY10E profit after tax of Idea Cellular by 28 per cent.
By ET Bureau |
MUMBAI: Given the increased competition and recent termination charge cut, Motilal Oswal Securities has downgraded FY10E profit after tax of Idea Cellular by 28 per cent. ���We expect near-term weakness in RPM and MOU on lower subscriber quality and increased discounting While EBITDA loss in new circles (esp. Bihar) could peak out in 4Q FY 09, six new circle launches lined up for 1QFY10-3QFY10 will continue to drag margins. Our FY10/ FY11 EBITDA estimate is now 5-6% lower than consensus while PAT is 30-40% lower,��� the brokerage says in a report.
Subscriber momentum remains strong for Idea. QTD, Idea (incl. Spice) reported second highest subscriber growth at 9.2%, largely driven by ramp-up in new circles (Mumbai and Bihar). However, Motilal Oswal expects aggressive expansion and full consolidation of Spice from FY10 will lead to 15% PAT decline in FY10E (21% decline in FY09E). The brokerage also expects earnings to stabilize only in FY11 (+ 6% Y-o-Y).
According to the brokerage, Idea is highly leveraged to mobile RPM movements given lower margins (PAT margin of 8% v/s 22-25% for Bharti and RCOM) and no significant non-wireless business. ���We believe that risk to tariffs is on the downside in the current environment due to several simultaneous new launches by Aircel, RCOM, Tata Tele, Vodafone, and Idea itself. We model a 15% RPM decline in FY10E (similar to Bharti) v/s 16-17% decline over FY07-09E.���
���Idea is trading at 7.1x EV/EBITDA FY10E and 23.7x EPS based on our revised estimates. Valuation premium reflects depressed earnings due to continued investments in new circles (which is currently loss making). However, given competitive pressure on incumbent circles, possibility of consensus downgrades, and low RoIC, stock performance is likely to remain muted,��� the report concluded.
Subscriber momentum remains strong for Idea. QTD, Idea (incl. Spice) reported second highest subscriber growth at 9.2%, largely driven by ramp-up in new circles (Mumbai and Bihar). However, Motilal Oswal expects aggressive expansion and full consolidation of Spice from FY10 will lead to 15% PAT decline in FY10E (21% decline in FY09E). The brokerage also expects earnings to stabilize only in FY11 (+ 6% Y-o-Y).
According to the brokerage, Idea is highly leveraged to mobile RPM movements given lower margins (PAT margin of 8% v/s 22-25% for Bharti and RCOM) and no significant non-wireless business. ���We believe that risk to tariffs is on the downside in the current environment due to several simultaneous new launches by Aircel, RCOM, Tata Tele, Vodafone, and Idea itself. We model a 15% RPM decline in FY10E (similar to Bharti) v/s 16-17% decline over FY07-09E.���
���Idea is trading at 7.1x EV/EBITDA FY10E and 23.7x EPS based on our revised estimates. Valuation premium reflects depressed earnings due to continued investments in new circles (which is currently loss making). However, given competitive pressure on incumbent circles, possibility of consensus downgrades, and low RoIC, stock performance is likely to remain muted,��� the report concluded.
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