1QFY2012 Result Update | Telecom

July 29, 2011

Idea Cellular
Performance highlights
(` cr) Net revenue EBITDA EBITDA margin (%) PAT
Source: Company, Angel Research

NEUTRAL
CMP Target Price
4QFY11 4,235 1,075 25.4 275 % chg (qoq) 6.8 12.0 124bp (35.4) 1QFY11 3,654 888 24.3 201 % chg (yoy) 23.7 35.5 232bp (12.0)

`94 -

1QFY12 4,521 1,204 26.6 177

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Telecom 31,154 0.6 97/56 641,988 10 18,197 5,482 IDEA.BO IDEA@IN

For 1QFY2012, Idea Cellular (Idea) outperformed street as well as our expectations on the revenue front; however, the company disappointed on the bottom-line front. The major highlight was inching up of ARPM by 1.0%; however, VAS as a percentage of overall revenue remained flat qoq, which slightly eroded revenue gains. We maintain our Neutral view on the stock. Quarterly highlights: For 1QFY2012, Idea reported consolidated revenue of `4,521cr, up 6.8% qoq, on the back of growth in ARPM by 1.0% qoq to `0.41/min. However, MOUs and ARPU declined by 1.5% and 0.6% qoq to 391min and `160/month, respectively. Also, VAS share as a percentage of revenue stood flat qoq at 12.1%, despite the launch of 3G in eight circles. EBITDA margin grew by 124bp qoq to 26.6% on the back of lower subscriber acquisition costs. PAT came in at `177cr, down 35.4% qoq, due to higher interest costs of `122.8cr and higher depreciation and amortisation expenses of `65.6cr on account of 3G as well as higher tax rates of 31% vs. 17.5% in 4QFY2011. Outlook and valuation Idea posted higher ARPM in 1QFY2011 after eight quarters of continuous declines in it. However, net subscriber addition numbers are cooling off on mom basis across all telecom players. Idea has already announced tariff hike in six circles and is expected to hike tariff rates in the remaining circles as well in the near term. This will, in turn, scale up ARPM, which we expect will post a 3.5% CAGR over FY201113E. With increasing ARPM, higher VAS share as a percentage of total revenue and rising number of subscribers for 3G services, we expect revenue to witness a 16.8% CAGR over FY201113E. We value the stock at EV/EBITDA of 7.2x FY2013E, i.e. at 10% discount to Bharti Airtels EV/EBITDA multiple, which gives us a fair value of `93. Hence, at current levels, we maintain our Neutral rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 46.0 8.0 10.1 35.9

Abs. (%) Sensex Idea

3m (4.9)

1yr 1.1

3yr 31.9 6.5

37.4 37.3

Key financials (Consolidated, Indian GAAP)

Y/E March (` cr) Net revenue % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2009 10,131 18.6 881 27.8 2.8 33.2 2.3 9.4 6.2 3.7 13.1

FY2010 12,447 22.9 954 8.3 27.4 2.9 32.6 2.6 7.4 7.0 3.1 11.4

FY2011 15,503 24.6 864 (9.4) 24.5 2.7 34.6 2.5 7.2 5.5 2.7 11.0

FY2012E 19,014 22.6 871 0.7 26.8 2.6 35.8 2.4 6.8 8.5 2.2 8.4

FY2013E 21,166 11.3 1,078 23.8 27.0 3.3 28.9 2.2 7.9 9.6 2.0 7.3

Srishti Anand
+91 22 3935 7800 Ext: 6820 srishti.anand@angelbroking.com

Ankita Somani
+91 22 3935 7800 Ext: 6819 ankita.somani@angelbroking.com

Please refer to important disclosures at the end of this report

Idea Cellular | 1QFY2012 Result Update

Exhibit 1: 1QFY2012 Financial performance (Consolidated, Indian GAAP)

(` cr) Net revenue Operating expenditure EBITDA Dep. and amortisation EBIT Interest charges Other income PBT Income tax PAT Minority interest Adj. PAT EPS (`) EBITDA margin (%) EBIT margin (%) PAT margin (%)
Source: Company, Angel Research

1QFY12 4,521 3,317 1,204 703 501 246 255 78 177 177 0.5 26.6 11.1 3.9

4QFY11 4,235 3,160 1,075 657 418 85 333 58 275 275 0.8 25.4 9.9 6.5

% chg (qoq) 6.8 5.0 12.0 6.9 20.0 188.4 (23.3) 34.0 (35.4) (35.4) (35.4) 124bp 122bp (256)bp

1QFY11 3,654 2,765 888 566 323 114 209 7 201 201 0.6 24.3 8.8 5.5

% chg (yoy) 23.7 19.9 35.5 24.2 55.3 115.8 22.2 973.0 (12.0) (12.0) (12.0) 232bp 226bp (159)bp

FY2011 15,503 11,713 3,791 2,432 1,359 396 963 98 864 864 2.7 24.5 8.8 5.6

FY2010 12,447 9,040 3,407 2,015 1,392 401 84 1,075 121 954 954 3 27.4 11.2 8.3

% chg( yoy) 24.6 29.6 11.3 20.7 (2.4) (1.0) (10.5) (19.1) (9.4) (9.4) (5.8) (292)bp (242)bp (276)bp

Exhibit 2: 1QFY2012 KPI data for the mobility business

1QFY12 ARPM (`/min) MOU (min) ARPU (`/month) EPM (`/min) Subscriber base (mn) EOP
Source: Company, Angel Research

1QFY12E 0.41 397 164 0.10 95.6

Var. (%) 0.9 (1.5) (2.7) 6.1 (0.5)

4QFY11 0.41 397 161 0.11 89.5

% chg (qoq) 1.0 (1.5) (0.6) 5.5 6.3

1QFY11 0.44 415 182 0.11 68.9

% chg (yoy) (6.8) (5.8) (12.1) 3.4 38.0

0.41 391 160 0.11 95.1

Exhibit 3: 1QFY2012 Actual vs. Angel estimates

(` cr) Net revenue EBITDA margin (%) PAT
Source: Company, Angel Research

Actual 4,521 26.6 177

Estimate 4438 26.0 195

% Var 1.9 61bp (9.0)

Revenue momentum continues

Idea reported decent set of 1QFY2012 numbers, with consolidated revenue growing by 6.8% qoq to `4,520.7cr as against `4,234.7cr in 4QFY2011. The mobility segments revenue posted robust 6.7% qoq growth to `4,484cr on the back of growth in ARPM (growth came in after a continuous decline in ARPM since the last eight quarters) by 1.0% qoq to `0.41/min and subscriber growth of 6.3% qoq with end-of-period (EOP) subscriber base standing at 95.1mn. This overshadowed the negative impact of the decline in MOU of 1.5% qoq to 391min from 397min in 4QFY2011.

July 29, 2011

Idea Cellular | 1QFY2012 Result Update

Exhibit 4: Trend in MOU

450 3.7 425
(min)

4.3 2.3 1.8 (1.0) (1.5)

6 3 0 (3) (6) (9)

(

400 375 350

(0.7) (6.0) (5.1)

%
)

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

MOU (min)
Source: Company, Angel Research

qoq growth (%)

During the quarter, ARPM reversed its falling trend of the last eight quarters and posted 1.0% qoq growth to `0.41/min due to reduction in promotional free minutes. Going ahead, the recent increase in tariff rates will further aid the companys ARPM to inch up.

Exhibit 5: Trend in ARPM

0.60 0.55 (0.5) 1.0 (3.4) (7.9) (8.9) (4.5) (6.4) (7.8) (2.9) 4 0

(`/min)

0.45 0.40

(8) (12)

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

ARPM (`/min)

qoq growth (%)

Source: Company, Angel Research

In 1QFY2011, VAS as a share of total revenue remained flat qoq at 12.1% despite the launch of 3G in eight circles, which was disappointing due to tepid rising rate of users of 3G services.

July 29, 2011

1QFY12

(%)

0.50

1QFY12

(4)

Idea Cellular | 1QFY2012 Result Update

Exhibit 6: Trend in VAS share in mobility revenue

14 13 12 12.4 10.1 10.6 11.2 12.6 12.9 13.0 12.1 12.1

(%)

11 10 9

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

VAS share (%)

Source: Company, Angel Research

Net addition in subscriber base declined to 5.6mn as against whopping 7.7mn in 4QFY2011. Net addition run rate across all telecom operators declined in 1QFY2011.

Exhibit 7: Trend in subscriber net additions

10 8 6.2 6 6.2 5.1 5.3 4.4 7.6 7.7 5.6

(mn)

4 2 0

4.1

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

Subscriber net additions (mn)

Source: Company, Angel Research

Thus, increased ARPM and modest subscriber net additions in 1QFY2012 arrested the steep downfall in ARPU, which was negatively affected by declining MOU and flat VAS as a percentage share of mobility revenue. ARPU came in at `160/month as against `161/month, down 0.6% qoq.

July 29, 2011

1QFY12

1QFY12

Idea Cellular | 1QFY2012 Result Update

Exhibit 8: Trend in ARPU

300 6

(`/month)

250 (4.3) 200 (8.7) 150 (9.9) (7.5)

0.6 (1.4) (4.2)

(0.6)

(6) (8.4) (12)

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

ARPU (`/month)

qoq growth (%)

Source: Company, Angel Research

EBITDA margin expands

For 1QFY2012, Ideas EBITDA margin expanded by 124bp qoq to 26.6% on the back of lower subscriber acquisition costs as net subscriber additions were lower during the quarter. The increase in EBITDA contributed to the improvement in EPM by 5.5% to `0.11/min. During the quarter, revenue for established service areas (ESA) stood at `4,075cr, up 6.4% qoq, with EBITDA margin growing by 170bp qoq to 29.6%. Revenue from new service areas (NSA) grew by 9.6% qoq to `481cr; however, EBITDA margin of NSA declined by 230bp qoq (29.0%). Going ahead, we expect EBITDA margin of NSA to scale up with the increase in tariff rates. In addition, the Indus Tower business showed 4.6% qoq revenue growth to `308cr, with EBITDA margin increasing by 190bp qoq to 44.6%.

Exhibit 9: Trend in EPM

0.17 0.15

0.16 0.14 0.13 0.13 0.11 0.10 0.11 0.11

(` /min)

0.13 0.11 0.09

0.10

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

Source: Company, Angel Research

July 29, 2011

1QFY12

(%)

Idea Cellular | 1QFY2012 Result Update

Exhibit 10: Trend in EBITDA margin

60 40 20 37 28 24 27 42 24 27 46 24 28 43 25 30 45 27

(%)

0 (20) (40) (60) (46) (42) 1QFY11 2QFY11 3QFY11 4QFY11 (27) 1QFY12 (29)

(35)

Established service areas

New service areas

Indus

Consolidated

Source: Company, Angel Research

Exhibit 11: Opex breakup

100 80 60 24.3 15.8 4.7 11.6 27.8 20 15.8 0 4QFY10 1QFY11 2QFY11 3QFY11 SGA cost 4QFY11 EBITDA margin Access charges Network costs
Source: Company, Angel Research

24.0 15.2 5.9 11.4 27.6 15.9

24.0 18.2 5.2 11.4 25.1 16.1

25.4 18.8 5.0 11.3 23.5 16.1

26.6 16.5 4.7 11.3 24.7 16.2

(%)
40

License fee

Employee cost

Outlook and valuation

Idea posted higher ARPM in 1QFY2011 after eight quarters of continuous declines in it. However, net subscriber addition numbers are cooling off on mom basis across all telecom players. Idea has already announced tariff hike in six circles AP, Gujarat, Kerala, Maharashtra, MP and UP (West) and is expected to hike tariff rates in the remaining circles as well in the near term. This will, in turn, scale up ARPM, which we expect will post a CAGR of 3.5% over FY201113E. With increasing ARPM, higher VAS share as a percentage of total revenue and rising number of subscribers for 3G services, we expect revenue to witness a 16.8% CAGR over FY201113E. We value the stock at EV/EBITDA of 7.2x FY2013E, i.e. at 10% discount to Bharti Airtels EV/EBITDA multiple, which gives us a fair value of `93. Hence, at current levels, we maintain our Neutral rating on the stock.

July 29, 2011

Idea Cellular | 1QFY2012 Result Update

Exhibit 12: Assumptions for KPIs

FY2010 ARPM (`/min) MOU (min) ARPU (`/month) Subscriber base (mn) - EOP 0.53 386 204 63.8 FY2011 0.42 395 166 89.5 FY2012E 0.43 383 163 103.7 FY2013E 0.45 360 162 113.6 % CAGR 3.5 (4.5) (1.2) 12.7

Source: Company, Angel Research; Note: EOP refers to end of period.

Exhibit 13: One-year forward EV/EBITDA

109,000 96,000 83,000 70,000 57,000 44,000 31,000 18,000 5,000

EV (`cr)

Dec-07

Dec-08

Dec-09

Dec-10
5

Apr-07

Apr-08

Apr-09

Apr-10

Aug-07

Aug-08

Aug-09

EV
Source: Company, Angel Research

17

14

11

Exhibit 14: Valuation

(` cr) EBITDA Target EV/EBITDA(x) Target EV Debt Cash Target Mcap Target price (`)
Source: Company, Angel Research

Aug-10

FY2013E 5,712 7.2 41,124 11,900 1,585 30,809 93

July 29, 2011

Apr-11

Idea Cellular | 1QFY2012 Result Update

Exhibit 15: Change in estimates

Parameter (` cr) Net revenue EBITDA Interest expense PBT Tax PAT

Earlier estimates 18,562 4,839 899 1,073 215 858

FY2012E Revised estimates 19,014 5,097 964 1,266 395 871

Variation (%) 2.4 5.3 7.3 18.0 83.9 1.5

Earlier estimates 21,134 5,631 899 1,400 280 1,120

FY2013E Revised estimates 21,166 5,712 958 1,586 508 1,078

Variation (%) 0.2 1.4 6.5 13.3 81.3 (3.7)

Source: Company, Angel Research

Exhibit 16: Recommendation summary

Company Bharti Airtel Idea Cellular Reliance Communication Reco. Neutral Neutral Neutral CMP Tgt. price (`) 437 94 102 (`) Upside (%) FY2013E P/BV (x) 2.5 2.2 0.5 FY2013E 16.7 28.9 14.4 FY2011-13E 28.2 9.5 4.5 FY2013E RoCE (%) 12.3 9.6 3.1 FY2013E RoE (%) 16.3 7.9 3.5 P/E (x) EPS CAGR (%)

Source: Company, Angel Research

July 29, 2011

Idea Cellular | 1QFY2012 Result Update

Profit and loss account (Consolidated, Indian GAAP)

Y/E March (` cr) Net sales Network operating expenditure % of net sales License and WPC charges % of net sales Roaming and access charges % of net sales Other expenses Total expenditure % of net sales EBITDA % of net sales Dep. and amortisation EBIT % of net sales Interest expense Other income, net Profit before tax Provision for tax % of PBT PAT Share in earnings of associate Minority interest Profit after minority interest EPS (`) FY2009 10,131 2,108 20.8 1,124 11.1 1,844 18.2 2,242 7,318 72.2 2,813 27.8 1,403 1,410 13.9 495 23 939 58 6.1 881 881 2.8 FY2010 12,447 3,127 25.1 1,347 10.8 1,800 14.5 2,766 9,040 72.6 3,407 27.4 2,015 1,392 11.2 401 84 1,075 121 11.3 954 954 2.9 FY2011 15,503 4,013 25.9 1,773 11.4 2,475 16.0 3,451 11,713 75.5 3,791 24.5 2,432 1,359 8.8 396 963 98 10.2 864 864 2.7 FY2012E 19,014 4,671 24.6 2,174 11.4 3,054 16.1 4,018 13,917 73.2 5,097 26.8 2,867 2,230 11.7 964 1,266 395 31.2 871 871 2.6 FY2013E 21,166 5,195 24.5 2,418 11.4 3,325 15.7 4,516 15,455 73.0 5,712 27.0 3,168 2,543 12.0 958 1,586 508 32.0 1,078 1,078 3.3

July 29, 2011

Idea Cellular | 1QFY2012 Result Update

Balance sheet (Consolidated, Indian GAAP)

Y/E March (` cr) Liabilities Share capital Reserves and surplus Additional paid up capital Stock option outstanding Total shareholders funds Convertible preference shares Total debt Deferred tax liabilities Other liabilities Total liabilities Assets Gross block - fixed assets Accumulated depreciation Net block Capital WIP Total fixed assets Net intangible assets Other non-current assets Goodwill on consolidation Non compete fees Current assets Inventories Debtors Cash Loans and advances Other current assets Total current assets Less:- current liab. Less:-provisions Net current assets Profit and loss account Total assets 52 362 3,086 1,682 186 5,369 3,864 172 1,332 526 22,817 54 466 290 2,556 298 3,663 3,845 223 (405) 504 19,950 60 555 1,478 3,560 386 6,038 7,280 264 (1,505) 24,632 65 625 1,384 3,803 465 6,342 6,520 323 (502) 26,269 65 696 1,585 4,471 465 7,282 7,156 381 (255) 26,448 20,523 5,997 14,526 2,141 16,667 2,045 2,246 27,059 8,891 18,168 547 18,714 1,130 6 33,698 11,213 22,485 3,647 26,132 6 38,198 14,080 24,118 2,647 26,765 6 42,398 17,248 25,150 1,547 26,696 6 3,100 10,671 18 13,790 2 8,912 113 22,817 3,300 8,530 44 11,874 2 7,859 214 19,950 3,301 8,947 48 12,296 4 12,023 310 24,632 3,300 9,818 48 13,165 4 12,800 300 26,269 3,300 10,896 48 14,244 4 11,900 300 26,448 FY2009 FY2010 FY2011 FY2012E FY2013E

July 29, 2011

10

Idea Cellular | 1QFY2012 Result Update

Cash flow statement (Consolidated, Indian GAAP)

Y/E March (` cr) Pre tax profit from operations Depreciation Expenses (deferred)/written off Pre tax cash from operations Other income/prior period ad Net cash from operations Tax Cash profits (Inc)/dec in Current assets Current liabilities Net trade working capital Cashflow from operating actv. (Inc)/dec in fixed assets (Inc)/dec in intangibles (Inc)/dec in investments (Inc)/dec in net deferred tax asset (Inc)/dec in minority interest (Inc)/dec in profit and loss account (Inc)/dec in other non-current assets Cashflow from investing actv. Inc/(dec) in debt Inc/(dec) in equity/premium Dividends Cashflow from financing actv. Cash generated/(utilised) Cash at start of the year Cash at end of the year 10,355 2,589 497 3086 (3,923) (2,797) 3,086 290 3,723 1,188 290 1478 776 (94) 1,478 1384 (900) 201 1,384 1585 (1,230) 1,334 104 2,389 (7,354) (1,489) 47 882 (2,240) (10,154) 2,397 7,958 (1,091) 32 (1,059) 1,910 (4,062) 915 101 23 2,240 (784) (1,053) (2,869) (1,188) 3,476 2,288 5,584 (9,849) 1,130 96 504 (8,119) 4,164 (441) (397) (700) (1,098) 2,640 (3,500) (10) (3,510) 777 (1) (739) 693 (46) 4,201 (3,100) (3,100) (900) FY2009 FY2010 FY2011 916 1,403 2,319 23 2,342 58 2,284 992 2,015 3,007 84 3,090 121 2,969 963 2,432 3,394 3,394 98 3,296 FY2012E 1,266 2,867 4,132 4,132 395 3,738 FY2013E 1,586 3,168 4,754 4,754 508 4,247

July 29, 2011

11

Idea Cellular | 1QFY2012 Result Update

Key Ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS (Fully diluted) Cash EPS Dividend Book value DuPont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days Payable days 0.6 10 162 0.7 12 156 0.6 12 173 0.7 12 171 0.8 12 169 6.2 8.1 9.4 7.0 7.1 7.4 5.5 5.9 7.2 8.5 9.0 6.8 9.6 10.2 7.9 0.9 0.7 0.1 0.4 1.7 6.4 0.9 0.8 0.1 0.6 1.7 8.0 0.9 0.7 0.1 0.6 2.0 7.0 0.7 0.6 0.1 0.7 2.0 6.6 0.7 0.6 0.1 0.8 1.9 7.6 2.8 6.9 0.0 41.8 2.9 9.0 0.0 36.0 2.7 10.0 0.0 37.2 2.6 11.3 0.0 39.9 3.3 12.9 0.0 43.1 33.2 13.6 2.3 3.7 13.1 1.6 32.6 10.5 2.6 3.1 11.4 1.9 34.6 9.5 2.5 2.7 11.0 1.7 35.8 8.3 2.4 2.2 8.4 1.6 28.9 7.3 2.2 2.0 7.3 1.6 FY2009 FY2010 FY2011 FY2012E FY2013E

July 29, 2011

12

Idea Cellular | 1QFY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Idea Cellular No No No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

July 29, 2011

13